NOT  A  PERIODICAL 
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NOT  A  PERIODICAL 

POLITICAl 
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UNIVERSITY  OF  ILLINOIS  STUDIES 

IN  THE 
SOCIAL  SCIENCES 


VOL.  VII  MARCH-JUNE,  1918  Nos.  1  and  2 


BOARD  OF  EDITORS 

ERNEST  L.  BOGART  JOHN  A.  FAIRLIE 

LAURENCE  M.  LARSON 


PUBLISHED  BY  THE  UNIVERSITY  OF  ILLINOIS 

UNDER  THE  AUSPICES  OF  THE  GRADUATE  SCHOOL 

URBANA,  ILLINOIS 


COPYRIGHT,  1918 
BY  THE  UNIVERSITY  OF  ILLINOIS 


Legislative   Regulation   of  Railway 
Finance   in   England 


CHING  CHUN  WANG 


PREFACE 

The  purpose  of  this  study  is  to  find  out  what  rules  the  English 
Parliament  has  adopted  from  time  to  time  for  the  regulation  of 
railway  finance,  and  to  ascertain,  as  far  as  possible,  why  these 
rules  were  adopted,  how  they  have  been  applied,  and  to  what 
results  they  have  led. 

In  this  study,  the  writer  used  the  series  of  the  so-called  finance 
acts  as  the  back  bone.  'After  having  become  familiar  with  the 
provisions  in  these  finance  acts  and  having  classified  these 
numerous  provisions  into  a  number  of  divisions,  he  then  traced, 
as  far  as  he  could,  the  parliamentary  debates  upon  these  meas- 
ures. He  also  endeavored  to  compare  the  original  bills  with  the 
amended  ones  as  well  as  to  examine  other  contemporary  bills 
which  had  anything  to  do  with  these  finance  bills,  with  the  hope 
of  understanding  the  position  of  the  legislators.  The  writer  also 
took  care  to  examine  the  popular,  the  railway,  as  well  as  the 
expert  financial  writers'  opinions  prevailing  during  those  years 
when  these  regulative  measures  were  adopted  or  agitated.  For 
this  purpose  the  London  Times,  the  Railway  Times,  and  the 
Economist  were  most  frequently  consulted. 

In  the  following  pages,  the  writer  has  endeavored  first  of  all 
to  trace  the  development  of  the  general  legislation  on  railway 
finance  so  that  a  fairly  comprehensive  idea  of  the  nature  of 
legislative  regulation  may  be  gained.  Then  follows  a  review 
of  the  efforts  of  parliament  to  secure  proper  restriction  upon  the 
issue  of  capital  securities,  attention  being  given,  in  the  first 
place,  to  share  capital.  Although  loan  capital  forms  only  about 
one-third  of  the  total  railway  capital,  the  method  of  control  has 
loomed  large  in  the  English  system  of  regulation.  Accordingly 
the  questions  of  limitation  upon  the  borrowing  powers  of  the 
railway  companies,  the  registration  of  railway  securities,  as  well 
as  the  regulation  of  loan  capital  itself  have  been  treated  in  some 
detail.  The  attitude  of  Parliament  toward  railway  stock  water- 
ing is  also  shown.  To  the  important  features  of  control  of  ac- 
counts, government  audit,  and  inspection  two  chapters  are  de- 
voted. 

Most  of  the  information  contained  in  this  study  is  obtained 
from  such  original  sources  as  the  British  Statutes  at  Large,  re- 
ports of  parliamentary  and  departmental  committees,  parliamen- 
tary debates,  direct  communications  from  offices  of  the  Board 
of  Trade,  and  similar  material. 


CONTENTS 


CHAPTER  I 
GENERAL  LEGISLATION  ON  RAILWAY  FINANCE 

CHAPTER  II 
LEGISLATIVE  SUPERVISION  OF  CAPITALIZATION  —  A.  SHARE  CAPITAL    . 

CHAPTER  III 
SUPERVISION  OF  RAILWAY  CAPITALIZATION  —  B.  LOAN  CAPITAL  . 

CHAPTER  IV 
CONTROL  OF  THE  BORROWING  POWERS  OF  RAILWAY  COMPANIES  . 

CHAPTER  V 
REGISTRATION  OF  RAILWAY  SECURITIES       .       .        ... 

CHAPTER  VI 
REGULATION  OF  STOCK  WATERING 

CHAPTER  VII 
THE  REGULATION  OF  RAILWAY  ACCOUNTS 

CHAPTER  VIII 

STATE  AUDITING  AND  INSPECTION 


BIBLIOGRAPHY 
INDEX  . 


30 


53 


81 


103 


121 


149 


175 

188 
193 


CHAPTER  I 
GENERAL  LEGISLATION  ON  RAILWAY  FINANCE 

As  England  was  the  pioneer  of  railway  building  so  was  she  the 
first  to  make  experiments  in  the  regulation  of  railway  finance. 
English  statesmen  had  recognized  the  importance  of  regulating 
railway  finance  before  any  other  country  had  seriously  consid- 
ered the  question.  As  early  as  the  railway  itself  was  introduced, 
we  find  traces  of  efforts  which  were  made  by  the  English  Parlia- 
ment in  this  direction. 

One  thing  which  especially  stands  out  to  the  credit  of  the 
English  legislature  is  the  fact  that  it  had  learned  a  great  deal 
about  the  regulation  of  railways  during  the  first  fifty  years  of 
railway  enterprise  and  had  then  arrived  at  certain  important 
conclusions  which,  in  some  other  countries,  have  not  been  prop- 
erly understood  until  very  recently.  From  the  early  thirties, 
English  legislators  have  recognized  that  the  interest  of  the  rail- 
ways is  bound  up  with  that  of  the  public  and  that  the  interests 
of  the  two  cannot  be  separated.1  Herein  lies  a  partial  explanation 
of  the  fact  that  Parliament  practically  has  never  enacted  laws 
which  might  properly  be  called  hostile  to  the  railway  companies. 

The  English  railways,  like  those  of  the  United  States,  are  pri- 
vate enterprises,  and  under  private  operation.  The  part  played 
by  both  Governments  is  that  of  a  supervisory  nature.  The  Gov- 
ernments of  both  countries  have  thought  of  purchasing  and 
owning  their  railways,2  and  both  have  refrained  from  adopting 
that  course. 

The  systems  of  regulation  of  the  two  countries  are  also  similar. 

1  See  the  remarks  of  Mr.  Homes  in  the  House  of  Commons,  1836.    Han- 
sard's  Parliamentary  Debates,  series  3   (hereafter  called  Hansard),  v.  46, 
p.  1336. 

2  Detailed  provisions  were  made  in  the  Railway  Regulation  Act,   1844 
(7  &  8  V.  c.  85),  for  Government  purchase  of  railways  under  certain  con- 
ditions. 

9 


10  RAILWAY   FINANCE  IN   ENGLAND  [10 

The  early  railway  charters  in  the  United  States  "reveal  almost 
at  a  glance,"  says  Prof.  B.  H.  Meyer,3  "their  common  origin  in 
the  English  law."  The  principles  underlying  our  federal  laws, 
as  well,  bear  much  resemblance  to  those  accepted  in  England. 
But  in  spite  of  such  great  similarities  there  is  a  striking  differ- 
ence between  the  two  systems  of  regulation.  This  difference, 
however,  lies  not  so  much  in  the  regulations  themselves  as  in  the 
manner  and  emphasis  of  regulation.  First  of  all,  the  United 
States  has  never  attempted  any  strict  regulation  of  railway 
finance,  while  England  has  always  regarded  the  regulation  of 
this  branch  of  railway  enterprise  as  essential.  Then  again  in 
England  there  is  only  one  kind  of  regulation  —  namely,  that 
adopted  and  enforced  by  the  national  legislature,  while  in  Amer- 
ica the  numerous  systems  of  state  regulation  have  been  of  greater 
importance  or  at  least  have  given  the  railways  more  trouble  than 
the  federal  regulation,  though  recent  developments  indicate  a 
large  increase  of  the  importance  of  the  latter.  The  railways  in 
England,  therefore,  do  not  have  any  such  complicated  contro- 
versies as  have  resulted  in  the  United  States  from  the  conflicting 
regulations  of  the  state  and  federal  governments. 

England  also  has  enjoyed  from  the  beginning  many  advan- 
tages, which  other  countries  envy.  There  has  always  been  a 
class  of  enterprising  capitalists  ready  to  embark  in  railway  un- 
dertakings and  a  class  of  men  qualified  by  ability  and  business 
habits  for  the  duties  of  railway  directors,  officers,  and  engineers. 
Therefore,  instead  of  having  trouble  in  persuading  capital  to 
embark  in  railways  when  the  enterprise  was  first  introduced,  as 
was  generally  the  case  in  other  countries,  England  found  it 
necessary  to  caution  capitalists  from  investing  too  readily.  Her 
problem  in  the  beginning  was  not  to  induce  investors  to  come 
forward,  but  to  caution  them  to  be  steady  and  to  protect  them 
from  being  swindled  by  "bubble"  schemes.  Her  difficulty  has 
not  been  to  extend  her  railway  system  but  to  prevent  superfluous 
construction. 

The  English  railway  system  had  its  origin  in  the  enterprise  of 
individuals  interested  in  the  different  localities.  The  efforts 
were  not  fostered  by  the  legislature  as  objects  of  national  con- 
cern, as  was  often  the  case  on  the  continent,  but  were  regarded 

s  Annals  of  American  Academy  of  Pol.  and  Social  Science,  vol.  10,  p.  390. 


11]  GENERAL,   LEGISLATION    ON    RAILWAY   FINANCE  11 

as  projects  undertaken  for  the  profit  of  their  promoters,  which 
Parliament  might  sanction  for  public  advantage.  In  dealing 
with  these  undertakings  the  legislature  followed  the  policy  which 
had  been  pursued  with  success  and  benefit  to  the  country  since 
the  middle  of  the  eighteenth  century,  of  allowing  private  enter- 
prise to  develop  and  manage  inland  navigation.  Under  this  sys- 
tem each  project  was  considered  entirely  on  its  own  merits,  and 
sanctioned  by  a  private  act  of  Parliament  which  contained  the 
entire  statute  law  applicable  to  the  undertaking.* 

In  the  regulation  of  railway  finance,  as  in  other  branches  of 
government  activity,  each  country  has  adopted  a  policy  deemed 
at  the  time  to  be  most  suitable  to  its  own  special  requirements. 
"The  continental  system  is  a  paternal  system  in  which  the  gov- 
ernment overlooks  and  controls  all  the  acts  of  the  companies. 
The  American  system  is  one  of  complete  freedom.  Neither  sys- 
tem is  exactly  suited  to  our  (English)  requirements,  or  our 
characteristics.  But  the  English  system  is  like  the  American,  in 
so  far  as  it  is  based  on  principles  of  freedom. ' '  This  remark  of 
the  Royal  Commission  on  Railways  of  1865-67  5  regarding  the 
rate  system  of  Europe  and  America  applies  equally  well  in  the 
case  of  railway  finance.  Thus  the  general  policy  of  the  Board  of 
Trade,  the  Government  office  which  has  much  to  do  with  rail- 
ways, "has  rather  been  to  favor  the  utmost  liberty  to  public 
companies  to  arrange  their  capital  in  any  way  they  pleased. ' ' 6 

But  at  the  same  time  the  English  Parliament  recognized  that 
for  the  public  advantage  it  is  desirable  that  a  railway  should 
yield  a  reasonable  return  to  its  investors.7  When  a  railway  pays 
little  or  no  dividend  on  its  capital,  it  has  been  feared  that  work- 
ing expenses  may  be  cut  down  injuriously,  with  the  resulting  dis- 
advantages of  insufficient  or  inefficient  service.  Then  again,  the 
embarrassment  of  one  company  in  failing  to  furnish  reasonable 
returns  on  its  capital  might  discourage  other  investors  from  com- 
ing forward  to  put  their  money  in  the  beneficial  railway  enter- 
prise, which  fact  would  result  not  only  in  the  checking  of  the 
railway  industry  itself  but  in  the  hampering  of  the  growth  of  all 

*  Beport  of  Eoyal  Commission  on  Railways,  1867,  p.  vii. 
5  Report  of  Royal  Com.  on  Railways,  1867,  p.  liL 

e  Evidence  before  Select  Committee  on  Railway  Stock  Conversion,  1890, 
p.  37. 

7  Report  of  Select  Committee  on  Railway  Borrowing  Powers,  1864,  p.  iii. 


12  RAILWAY   FINANCE  IN   ENGLAND  [12 

other  industries  and  commerce  in  general.  Furthermore,  Eng- 
land has  for  years  recognized  the  value  of  encouraging  the  cir- 
culation of  capital,  as  shown  by  her  effort  to  provide  for  the  in- 
vestment of  all  trust  funds.  These  and  other  reasons  led  Parlia- 
ment to  attempt,  from  the  beginning  of  railway  enterprise,  to 
regulate  railway  finance  not  for  the  direct  interest,  of  the  gov- 
ernment but  for  the  security  of  the  investors.8  From  a  close 
study  of  the  efforts  of  Parliament  in  regulating  railway  finance, 
one  cannot  fail  to  be  impressed  by  the  feeling  that  the  English 
legislature  has  constantly  borne  this  in  mind. 

There  were  in  England,  during  the  early  years  of  its  railway 
history,  as  there  are  now  in  the  United  States,  many  people  who 
did  not  believe  in  government  regulation  of  railway  finance  for 
the  protection  of  investors.  A  leading  lawyer  in  London  said,9 
"I  do  not  see  why  the  Legislature  should  interfere  to  protect 
them  (railway  investors)  more  than  other  people.  If  they  choose 
to  take  shares  upon  those  conditions,  it  is  their  own  affair."  A 
prominent  financial  paper10  also  said  that  "as  a  principle,  we 
believe  there  is  nothing  more  objectionable  than  an  attempt  on 
the  part  of  a  government  to  find  prudence  for  the  people.  It  re- 
moves a  great  weight  of  personal  and  individual  responsibility 
and  caution,  and  creates  a  reliance  on  public  officers  as  the  only, 
however  imperfect,  substitute. ' ' 

These  opinions  changed  radically  at  times/1  but  gradually 
people  began  to  appreciate  the  fact  that  certain  regulations  are 
indispensable  for  the  protection  of  the  investors  in  such  a  com- 
plicated business  as  railways,  where  it  is  well  nigh  impossible 
for  the  layman  investor  to  ascertain  the  value  or  safety  of  se- 
curities issued,  and  where  the  confidence  of  the  multitude  of  in- 

s  Report  of  Committee,  April  24,  1837,  p.  xxvii,  Parliamentary  Papers, 
1837,  vol.  14,  part  1. 

9  Evidence  before  Select  Committee  on  Eailway  Companies'  Borrowing 
Powers,  1864,  p.  20. 

10  Economist,  February  8,  1845. 

11  The  Economist  said  that  at  one  period,  ' '  men  loudly  complain  of  any 
impediment,  however  right  it  may  be,  which  the  restriction  of  acts  of  Par- 
liament throw  in  their    (railways')    way,"  while   at  another  time,   "they 
evince  the  greatest  impatience  that  Parliament  will  not  at  once  disregard 
every  general  principle  and  interfere  by  compulsory  means  to  put  a  stop  to 
a  course  undertaken  with  their  own  free-will."     Economist,  April  11,  1846. 


13]  GENERAL    LEGISLATION    ON    RAILWAY   FINANCE  13 

vestors  has  an  immediate  and  serious  effect  upon  the  commerce 
of  the  whole  nation. 

This  general  policy  has  changed  from  time  to  time,  although 
not  as  violently  as  it  has  in  some  other  countries  or  as  it  has  in 
the  regulation  of  other  branches  of  railway  enterprise  in  Eng- 
land itself.12  The  change  of  policy  has  been  due,  on  the  one 
hand,  to  the  change  of  public  opinion  and  the  circumstances  of 
the  time;  and,  on  the  other  hand,  to  the  changes  within  Parlia- 
ment itself.  It  may  be  said  safely  that  English  railway  policy 
has  largely  depended  upon  a  varying  and  conglomerate  body  of 
legislators,  ' '  who  may  be  assumed  to  have  had  no  special  famili- 
arity with  the  subject  on  which  they  were  legislating. "  13  As 
Parliament  has  power  to  adopt  any  general  or  special  measures  to 
regulate  any  branch  of  railway  enterprise  as  it  sees  fit,  one  may 
readily  expect  that  occasional  deviations  from  the  adopted  prin- 
ciples would  be  made. 

The  nature  of  the  English  system  of  regulation  is  also  charac- 
teristic. Railway  finance  in  England  is  regulated  by  two  sets  of 
rules  : 

A.  General  laws  applicable  to  all  companies. 

B.  Special  laws  applicable  to  particular  companies. 

The  general  laws  are  based  on  broad  principles  and  are  em- 
bodied in  the  general  acts  of  Parliament.  These  general  acts  are 
applicable  as  a  whole  or  only  by  incorporation  in  the  special  acts 
of  the  companies  as  the  case  may  be.  The  special  acts,  which  are 
enacted  to  govern  individual  companies,  resemble  the  charters 
in  the  United  States,  but  are  obtainable  only  from  Parliament  by 
fulfilling  certain  requirements. 

In  the  first  place,  the  special  act  creates  an  incorporated  com- 
pany with  all  the  corporate  privileges  attaching  to  such  incor- 
poration. In  the  next  place,  it  gives  power  for,  and  prescribes 
rules  governing  the  raising  of  capital.  Then  it  grants  the  com- 
pany the  necessary  powers  to  take  land,  lays  down  the  rules  gov- 
erning meetings  of  the  company,  the  construction  of  the  road, 
and  finally  it  defines  the  right  of  the  public  in  using  the  railway. 
It  also  outlines  the  powers  of  the  company,  for  example  in  charg- 
ing tolls.  The  fact  that  out  of  a  total  number  of  forty-four  sec- 

12  J.  S.  Jeans,  Railway  Problems,  1887,  p.  64. 

13  w.  W.  Acworth,  Elements  of  Bailway  Economics,  1905,  p.  132. 


14  RAILWAY   FINANCE  IN   ENGLAND  [14 

tions  of  a  recent  railway  bill "  fourteen  are  devoted  to  financial 
matters,  fairly  indicates  the  importance  attached  by  Parliament 
to  the  regulation  of  railway  finance. 

In  these  special  acts  are  included  not  only  the  special  regula- 
tions made  to  meet  the  individual  conditions  of  the  company,  but 
also  various  provisions  contained  in  the  general  companies  acts. 
A  clause  is  uniformly  inserted  to  subject  the  company  to  "the 
provisions  of  any  general  act  relating  to  railways  now  in  force, 
or  which  may  hereafter  pass. ' ' 15 

It  follows,  as  a  consequence  of  Parliament  having  granted  to 
each  company  in  its  special  act  its  corporate  privileges,  that 
when  the  company  desires  to  alter  the  terms  of  that  incorporat- 
ing act,  to  enlarge  its  original  capital,  or  in  any  way  to  vary  the 
conditions  under  which  the  capital  is  to  be  raised,  a  new  applica- 
tion to  Parliament  becomes  necessary.16 

The  most  important  of  the  general  acts  governing  railway 
finance  are  the  Companies  Clauses  Acts,  1845  and  1863,  Railway 
Companies  Securities  Act,  1866,  Railway  Companies  Act,  1867, 
Regulation  of  Railways  Act,  1868,  and  Railway  Regulation  Act, 
1871.  All  except  the  first  two  acts  named  above  are  applicable 
to  all  railways  without  incorporation  in  the  special  acts. 

In  the  enactment  of  special  acts,  Parliament  is  guided  by  a  set 
of  standing  orders  as  well  as  its  model  bills  and  clauses. 

While  the  development  of  English  legislation  on  railway 
(finance  has  been  a  continuous  one,  still  it  may  be  divided  into 
three  periods.  The  years  from  1801  to  1844  form  the  first 
period,  1845  to  1871,  the  second  period,  and  1872  to  date,  the 
third  period. 

Although  railway  finance  has  received  much  consideration 
from  the  beginning,  during  the  first  period  it  was  regulated  in  a 
more  or  less  haphazard  manner.  The  legislative  measures  then 
taken  were  modelled  after  the  special  canal  and  turnpike  enact- 
ments. There  was  no  general  law  governing  railway  finance. 

The  second  period,  covering  the  twenty-seven  years  from  1845 
to  1871,  is  by  far  the  most  important  in  the  history  of  English 
legislation  on  railway  finance.  Concurrent  with  the  railway 

i*  The  Coventry  Railway  Bill,  1910,  now  withdrawn. 

is  Standing  Order  No.  1686  of  the  House  of  Commons,  1906. 

is  Report  of  the  Royal  Commission  on  Railways,  1867,  p.  xlii. 


15]  GENERAL,   LEGISLATION    ON    RAILWAY    FINANCE  15 

mania  and  disastrous  railway  panics  which  formed  a  special 
feature  of  this  period,  the  English  system  of  financial  legislation 
underwent  rapid  evolution  and  was  subjected  to  repeated  tests. 
The  financial  problems  of  railways  formed  a  common  topic  of 
conversation  and  were  kept  constantly  before  the  eyes  of  Parlia- 
ment. Numerous  inquiries  were  put  on  foot,  and  attempts  made 
to  bring  the  system  of  legislation  to  a  higher  state  of  efficiency. 
As  a  result  of  this  unparalleled  activity  of  both  the  public  and 
Parliament,  all  the  important  general  acts  governing  railway 
finance  were  passed  during  this  period.  The  rules  which  were 
then  adopted  have  remained  unchanged,  and  few  additions  have 
been  made.  The  regulations  which  England  uses  to-day  in  gov- 
erning railway  finance,  with  the  single  exception  of  the  Railway 
Accounts  Act  of  1911,  are  exactly  those  adopted  prior  to  1871. 
Be  these  acts  efficient  or  not,  the  fact  that  they  have  seen  service 
for  over  forty  years  without  being  modified  clearly  indicates 
either  one  or  the  other  of  two  theories.  First,  it  may  mean  that 
the  English  system  had  been  developed  to  such  completeness  prior 
to  1871  that  no  modification  has  become  necessary  or,  secondly, 
it  may  mean  that  after  the  exertion  during  the  .sixties,  the  Eng- 
lish have  been  undergoing  a  state  of  reaction  and  have  since  be- 
come too  inert  to  modify  these  rules.  While  both  hypotheses  are 
to  a  certain  extent  permissible,  history  shows  the  first  to  be  the 
more  reasonable. 

As  has  been  indicated  before,  no  legislation  on  railway  finance 
has  taken  place  since  1871.  From  that  year  on  has  been  a  period 
of  application  of  principles  already  adopted  during  the  first  two 
periods.  Stock-watering  received  consideration  in  1890,  but  no 
general  legislation  or  new  principle  was  evolved.  Moreover,  the 
present  outlook  indicates  that  with  the  exception  of  some  legisla- 
tion on  railway  accounting,  few  material  changes  are  likely  to 
take  place  in  the  near  future. 

While  the  general  purpose  of  all  the  legislation  is  to  afford  se- 
curity to  the  investors,  yet  the  place  of  emphasis  of  each  period 
is  distinct  and  different  from  those  of  the  other  periods.  Thus 
the  early  legislation  was  largely  for  the  purpose  of  insuring  the 
bona  fide  character  of  railway  enterprise  before  granting  Parlia- 
mentary recognition  and  of  demanding,  though  without  a  true 
understanding  of  its  significance  at  the  time,  publicity  of  rail- 


16  RAILWAY   FINANCE   IN    ENGLAND  [16 

way  affairs.  Different  from  almost  all  other  nations,  as  already 
stated,  the  English  did  not  have  trouble  in  inducing  investors  to 
embark  in  railway  enterprises.  On  the  contrary,  she  had  to  ex- 
ercise considerable  restraining  influence.  Thus  the  most  prom- 
inent topic  of  legislation  during  the  early  period  was  the  matter 
of  preventing  ' '  bubble ' '  schemes  by  securing  an  efficient  system 
of  subscription  contracts  and  of  requiring  substantial  deposits  of 
money  on  each  share  subscribed,  before  permitting  railway  enter- 
prises to  receive  Parliamentary  sanction. 

The  question  which  received  the  greatest  emphasis  during  the 
second  period  was  how  to  restore  the  confidence  of  the  investing 
public.  The  early  regulations  proved  to  be  too  indefinite,  and 
railway  finance  was  found  to  demand  more  public  interference. 
Therefore,  efforts  were  mostly  directed  toward  finding  methods 
of  regulating  railway  finance  rather  than  to  the  discovery  of  new 
principles. 

Coming  to  the  third  period,  we  find  the  place  of  emphasis  has 
returned  to  that  of  the  first  period,  especially  in  the  matter  of 
publicity.  The  most  important  inquiries  made  during  this  period 
have  invariably  resulted  in  the  demand  for  greater  publicity.  In 
spite  of  this  similarity  in  emphasis,  however,  there  is  neverthe- 
less a  distinct  difference,  in  that  what  has  been  done  during  the 
third  period  is  more  definite  and  has  been  done  with  a  much 
clearer  conception  of  what  publicity  means  in  the  regulation  of 
railway  finance  than  during  the  first  period.  After  forty  years' 
experiment,  England  has  remained  where  she  was  four  decades 
ago,  as  far  as  the  standing  rules  are  concerned ;  but  she  seems  to 
have  determined  upon  the  relative  emphasis  to  be  applied  to  her 
system  of  regulation  in  the  future. 

In  tracing  the  historical  development  we  find  that  prior  to 
1844  English  legislation  on  railway  finance  was  limited  to  the 
provisions  embodied  in  the  numerous  private  acts.  Each  com- 
pany had  its  own  special  acts  which  contained  the  entire  statute 
law  applicable  to  the  undertaking  of  that  company.17 

Early  legislation  was  greatly  influenced  by  the  current  con- 
ception of  the  railway  as  a  turnpike.  Time  and  again  we  find 
acts  passed  which  dealt  jointly  with  stage  roads  and  railways  as 
if  the  two  were  similar.  The  Duke  of  Wellington  is  said  to  have 

IT  Report  of  Eoyal  Commission  on  Railways,  1867,  p.  vii. 


17]  GENERAL   LEGISLATION    ON    RAILWAY   FINANCE  17 

stated  that  in  dealing  with  railways  it  was  above  all  else  neces- 
sary to  bear  in  mind  the  analogy  of  the  King's  highways.18  This 
remark,  misleading  as  it  appears  now,  was  well  representative  of 
the  current  belief. 

Then  again,  the  early  acts  followed  very  closely  in  their  gen- 
eral scope,  the  provisions  which  had  been  applied  to  canal  com- 
panies. The  earliest  canal  acts,  however,  gave  no  power  of  bor- 
rowing,19 while  the  railways  had  been  permitted  to  borrow  from 
the  beginning,  to  a  certain  extent.  Thus  the  act  of  May  21, 
1801,20  the  earliest  railway  act,  providing  for  the  construction 
and  maintenance  of  a  railway  from  Wandsworth  to  Pitlake, 
stated,  ' '  Proprietors  may  raise  £30,000  by  shares  of  one  hundred 
pounds  each,  to  be  numbered  and  deemed  as  personal  estate. 
Names  of  proprietors  to  be  entered  in  a  book,  and  tickets  of  their 
shares  distributed  to  them.  Proprietors  may  raise  £15,000  more 
if  necessary,  by  subscription  or  mortgage." 

Before  1847  considerable  laxity,  however,  prevailed  in  the 
manner  of  framing  the  provisions  governing  the  raising  of  cap- 
ital. But  the  great  burst  of  railway  extension  in  1836  awakened 
some  legislative  activity,  and  the  committees  of  Parliament 
on  railway  bills  began  to  feel  the  necessity  of  enacting 
clauses  conducive  to  the  public  welfare.  A  select  committee  was 
appointed  to  inquire  into  the  matter,  but  no  legislation  took 
place.21  However,  the  restrictions  imposed  by  Parliament,  in 
1837  and  subsequently  on  the  obtaining  of  railway  acts,  tem- 
porarily arrested  speculation. 

In  1839  a  select  committee  was  again  appointed  to  inquire  into 
the  state  of  railway  communication,  and  as  a  result  of  its  recom- 
mendations a  general  "saving"  clause  was  inserted  in  the  Croy- 
don  railway  bill.22  In  1840  another  select  committee  was  ap- 
pointed by  the  House  of  Commons  to  inquire  into  railway  af- 

is  C.  F.  Adams,  Railroads,  p.  82. 

19  The  first  act  in  which  these  powers  appeared  was  passed  in  1770.    By 
degrees  the  borrowing  powers  of  public  companies  were  restricted  to  one- 
third  of  their  share  capital.     See  Report  of  Eoyal  Commission  on  Bailways, 
1867,  p.  vii. 

20  41  George  3,  c.  33. 

21  Quarterly  Review,  v.  LXXIV,  p.  239. 

22  The  "saving"  clause  inserted  in  the  Croydon  bill  reads: 

' '  And  be  it  further  enacted  that  nothing  herein  contained  shall  be 
deemed  or  construed  to  exempt  the  railway  by  this  or  the  said  recited  acts 


18  RAILWAY   FINANCE  IN   ENGLAND  [18 

fairs.23  Although  no  general  legislation  took  place,  commit- 
tees seem  to  have  done  considerable  good  in  throwing  light 
upon  the  nature  of  railway  transportation.24 

Under  this  irregular  system  of  legislation  numerous  charters 
were  granted  and  liberal  encouragements  were  sometimes  given 
to  the  construction  of  railways.  Then  came  that  disastrous  rail- 
way mania  of  1844,  and  England  "awoke  one  day"  as  C.  F. 
Adams  dramatically  describes  it,  "from  dreams  of  boundless 
wealth  to  the  reality  of  general  ruin. ' ' 25 

To  see  what  could  be  done  to  improve  the  situation,  a  Parlia- 
mentary committee  was  appointed  early  in  1844.  It  recom- 
mended, and  Parliament  resolved  that  the  following  "saving" 
clause,  which  had  been  inserted  in  railways  bills  in  1839,  should 
be  uniformly  inserted  in  all  railway  bills  approved  by  Parlia- 
ment. The  clause  was  as  follows:  "And  be  it  further  enacted 
that  nothing  herein  contained  shall  be  deemed  or  construed  to 
exempt  the  railway  by  this  or  the  said  recited  Acts  authorized  to 
be  made  from  the  provisions  of  any  general  Act  relating  to  such 
Bills  which  may  pass  during  the  present  session  of  Parliament, 
or  of  any  general  Act  relating  to  railways  which  may  pass  dur- 
ing the  present  or  any  future  session  of  Parliament." 

The  committee  gave  to  the  question  of  railway  legislation  a 
more  comprehensive  consideration  than  it  had  hitherto  received. 
As  a  result  of  the  inquiries  of  this  committee,  provisions  were 

authorized  to  be  made,  from  the  provisions  of  any  general  act  relating  to 
railways  which  may  pass  during  the  present  or  any  future  session  of  Par- 
liament."  Hansard,  v.  47,  pp.  682-684.  Compare  with  a  similar  clause 
resolved  by  Parliament  to  be  inserted  in  all  railway  bills,  since  1844,  which 
appears  in  the  next  page. 

23  Eeport  of  Boyal  Commission  on  Railways,  1867,  p.  x. 

24  This  committee  was  the  first  body  of  officials  to  point  out  to  Parlia- 
ment that  the  right  reserved  to  the  public  by  the  early  railway  acts  of  run- 
ning their  engines  and  carriages  on  the  railways  was  practically  a  dead 
letter,  for  the  reason  that  (1)  no  provision  had  been  made  for  ensuring  to 
independent  trains,  etc.,  access  to  stations  and  watering  places  along  the 
line,  (2)  the  rates  of  charges  limited  by  the  acts  were  almost  always  too 
high  to  permit  independent  parties  to  work  their  trains,   (3)  the  necessity 
of  placing  the  running  of  all  trains  under  the  complete  control  of  one  man- 
agement  interposed   much   difficulty   in    the  way   of   independent   traders. 
Ibid.,  p.  x. 

25  C.  F.  Adams,  Railroads,  p.  85. 


19]  GENERAL    LEGISLATION    ON    RAILWAY   FINANCE  19 

made,  in  the  Railway  Regulations  Act,  1844,26  for  the  suppres- 
sion of  loan  notes  which  had  been  issued  without  legal  authority 
during  the  period  of  rapid  railway  extension. 

By  this  time  the  provisions  of  the  special  acts  governing  each 
company  had  become  very  complicated  and  numerous.  The  num- 
ber of  clauses  contained  in  some  of  these  acts  had  gradually  in- 
creased from  95,  as  in  the  act  for  the  Wandsworth  and  Croyden 
Railway,  1801,  to  381,  as  in  the  act  of  the  Lancaster  and  Carlisle 
Railway  passed  in  1844.  As  Lord  Somerset27  remarked  in  the 
House  of  Commons,  there  were  an  "immense"  number  of  stat- 
utes relating  to  these  railway  matters  which  occasioned  a  great 
amount  of  uncertainty.  In  order  to  obtain  greater  uniformity 
in  the  general  provisions  inserted  in  railway  acts  and  to  render 
them  more  concise,  the  select  committee  of  1844  2S  recommended 
that  the  numerous  clauses  in  railway  acts  which  ' '  were  common 
to  all  and  undisputed ' '  should  be  consolidated  into  a  general  act. 

In  the  following  year,  Parliament  following  the  recommenda- 
tions of  the  select  committee  of  1844,  for  the  first  time  passed 
three  clauses  consolidation  acts,  containing  the  clauses  which 
were  applicable  to  companies  in  general  and  which  had  been 
usually  inserted  in  the  private  acts,  as  well  as  some  other  general 
provisions  which  Parliament  deemed  it  desirable  to  enforce.  This 
was  done  with  the  hope  of  securing  uniformity.  The  acts,  how- 
ever, did  not  prevent  committees  of  either  house  of  Parliament 
from  dispensing  with  some  of  these  provisions  in  particular  cases. 

One  of  the  three  general  acts  had  to  do  with  the  regulation  of 
railway  finance.  This  act 29  contained  provisions  for  regulating 
the  manner  in  which  the  companies'  capital  should  be  raised,  the 
further  borrowing  of  money,  the  rights  and  responsibilities  of 
shareholders,  the  powers  and  duties  of  directors,  the  declaration 
of  dividends,  the  keeping  and  auditing  of  accounts,  and,  in  a 
general  way,  the  manner  in  which  the  companies'  financial  af- 
fairs should  be  conducted.30 

The  expectations  of  the  legislature  in  enacting  the  general  act 

26  7  &  8  V.  e.  85  ss.  19-21. 

27  Hansard,  v.  77,  p.  170. 

28  Report  of  Royal  Commission  on  Railways,  1867,  p.  xi. 

29  The  Companies  Clauses  Act,  1845,  8  V.  c.  16. 

30  See  also  Report  of  Royal  Commission  on  Railways,  1867,  p.  xii. 


20  RAILWAY   FINANCE  IN   ENGLAND  [20 

were  fully  and  quickly  realized.  The  consolidation  of  the  nu- 
merous clauses  brought  about  a  great  degree  of  certainty  and 
uniformity,  and  made  the  law  more  accessible  and  intelligible  to 
the  public. 

It  must  be  remembered  that,  at  the  time  when  the  Companies 
Clauses  Act,  1845,  was  passed,  the  great  railway  mania  was  at  its 
height.  The  profitable  returns  afforded  by  the  earlier  railways 
attracted  a  large  amount  of  capital.  Consequently  competing 
lines  were  proposed  to  most  of  the  important  centers  of  popula- 
tion. Parliament,  as  the  report  of  the  select  committee  of  1844 
showed,  sanctioned  many  such  lines  for  the  purpose  of  encour- 
aging competition,  with  the  belief  that  the  remedy  for  the  evil 
consequences  of  any  monopoly  which  a  railway  was  thought  to 
possess,  was  to  be  found  in  the  construction  of  a  competing 
line.31  ' '  There  has  certainly  never  before  been  any  one  object  of 
speculation, ' '  said  the  Economist  in  1845,  ' '  into  which  all  classes 
and  ranks  of  men  have  entered  so  warmly  as  at  this  time  into 
railways.  There  seemed  to  be  no  business  too  absorbing,  no  pro- 
fession too  grave,  and  no  privacy  too  secluded,  to  be  able  to  keep 
off  this  universal  mania."  32 

Reaction  soon  followed  action  with  equal  force.  The  feverish 
railway  extension  led  to  a  demand  for  capital  for  investment 
larger  than  the  resources  of  the  country  could  supply.  As  the 
railway  fever  was  intense,  so  was  the  railway  collapse  complete. 
At  the  end  of  1847  an  act 33  had  to  be  passed  to  extend  the  time 
for  the  construction  of  many  railways,  and  in  1850  another  act 34 
to  enable  railway  companies  to  abandon  powers  of  proceeding 
with  portions  of  their  undertakings,  and  to  release  them  from 
the  conditions  which  had  been  attached  to  such  powers.  The 
complete  collapse  may  be  shown  by  the  fact  that  of  the  8,592 
miles  of  railway  sanctioned  in  the  three  sessions  of  1845,  1846, 
and  1847,  no  less  than  1,560  miles  were  abandoned  under  the 
power  of  the  Railway  Abandonment  Act.35 

The  financial  difficulties  caused  by  the  pressure  for  capital  led 
the  House  of  Lords  to  appoint  a  committee  in  1849  to  consider 

31  Report  of  Eoyal  Commission  on  Eailways,  1867,  p.  xvii. 

32  Economist,  February  1,  1845. 

ss  See  Report  of  Royal  Commission  on  Railways,  1867,  p.  xvi. 
3*  Abandonment  of  Railways  Act,  1850,  13  &  14  V.  c.  83. 
35  Report  of  Royal  Commission  on  Railways,  1867,  p.  xviii. 


21]  GENERAL   LEGISLATION    ON    RAILWAY   FINANCE  21 

whether  the  railway  acts  did  not  require  amendment,  with  a  view 
of  providing  for  a  more  effectual  audit  of  accounts,  to  guard 
against  the  wrong  application  of  the  companies'  funds.38  This 
committee  recommended,  for  the  first  time  in  railway  history, 
the  adoption  of  a  uniform  system  of  accounts  and  government 
audit.37  No  immediate  legislation,  however,  took  place. 

These  and  other  events  which  took  place  during  the  later 
forties  and  the  fifties  brought  to  light  many  new  problems  in 
railway  finance,  as  a  result  of  which  additional  provisions  differ- 
ent from  those  contained  in  the  Companies  Clauses  Act,  1845, 
were  frequently  introduced  into  railway  bills.  Accordingly,  the 
Companies  Clauses  Act  of  1863,38  was  enacted  to  extend  the 
former  clauses  act.  This  act  of  1863  contained  four  new  prin- 
ciples, of  which  the  first  three  had  to  do  with  railway  finance. 
The  first  of  these  three  related  to  the  cancellation  and  surrender 
of  shares,  the  second  had  to  do  with  the  creation  of  additional 
capital,  and  the  third  governed  the  creation  and  issue  of  deben- 
ture stocks. 

During  this  period,  the  railways,  in  addition  to  their  tendency 
toward  extension,  had  a  general  policy  of  "buying  up"  every 
thing,  in  order  to  keep  out  all  other  lines  from  their  own  districts, 
at  the  same  time  invading  as  far  as  possible  those  of  other  lines.39 
This  of  course  proved  as  costly  to  themselves  as  it  was  to  their 
enemies.  Heavy  debts  were  contracted  "for  the  purpose  of  se- 
curing old  traffic  against  intruders  and  for  developing  new  traffic 
for  extensions  and  branches.  '  '  40  These  struggles  developed  to 
such  an  extravagant  extent  that  in  spite  of  the  favorable  gross 
incomes,  the  dividends  were  low.  Therefore,  some  shareholders 
'  '  sincerely  believed  that  if  the  Committee-rooms  of  the  House  of 
Commons  were  closed  for  five  years,  it  would  be  the  most  impor- 
tant thing  that  had  ever  been  done  to  protect  railway  property." 

But  Parliament  apparently  failed  to  realize  clearly  the  serious 
nature  of  the  situation.  It  had  adopted  a  number  of  restrictions, 
but  it  failed  to  see  to  it  that  these  restrictions  were  enforced. 


36 

37  Much  attention  was  given  to  the  question  of  uniform  accounts.     The 
subject  will  be  taken  up  more  fully  in  Chapters  VII  and  VIII. 

38  26  &  27  V.  c.  118. 

39  London  Times,  February  9,  1863,  p.  9. 
<o  London  Times,  February  23,  1863,  p.  8. 


22  RAILWAY   FINANCE  IN   ENGLAND  [22 

Consequently  the  speculative  schemes  as  well  as  established  com- 
panies found  it  quite  easy  to  get  around  the  Parliamentary  re- 
strictions. Men  of  straw  were  secured  to  sign  up  subscriptions 
for  shares.  Borrowed  money  was  produced  as  paid-up  portions 
of  shares  for  deposit.  Furthermore,  not  only  was  the  legal  limit 
of  borrowing  powers  in  many  cases  exceeded  by  the  excessive 
issue  of  debenture,  but  a  sort  of  note  called  Lloyd 's  bonds 41  was 
issued  for  amounts  of  money  many  times  in  excess  of  the  statu- 
tory borrowing  powers.  As,  according  to  the  existing  law,  only 
the  securities  issued  within  the  parliamentary  limits  were  legal 
and  hence  valid,  much  confusion  and  difficulty  followed  the  ex- 
cessive issues,  which  in  turn  greatly  damaged  the  credit  of  rail- 
way companies.  Further  money,  consequently,  was  difficult  to 
obtain. 

Parliament,  as  most  governments  would  do  when  in  difficulty, 
appointed  two  select  committees,  one  in  1863  and  the  other  in 
the  following  year,  to  investigate  the  matter.  These  two  select 
committees  made  a  number  of  good  recommendations  for  the  bet- 
terment of  railway  finance,  but  no  action  was  taken  by  Parlia- 
ment to  give  effect  to  these  recommendations  until  1866,  when 
the  Companies  Securities  Act,  1866,42  was  passed,  requiring, 
under  penalty  for  failure,  the  railway  companies  to  have  regis- 
tered officers  and  to  deposit  with  the  registrar  of  joint  stock  com- 
panies statements  of  their  borrowing  powers  and  half-yearly  loan 
accounts.  In  the  act  were  also  set  forth  the  particulars  to  be 
specified  in  these  statements  and  half-yearly  accounts.  The  act 
also  prohibited  railway  companies  from  borrowing  any  money 
before  depositing  the  statement  of  their  borrowing  powers  just 
•referred  to.  Moreover,  the  directors  were  required  to  declare 
"each  for  himself"  on  every  mortgage  deed  or  bond,  or  certifi- 
cate of  debenture  stock,  that  the  specific  security  was  issued 
under  the  borrowing  powers  of  the  company  as  registered. 

This  measure,  useful  as  it  has  proven  to  be,  was  far  from  being 
effective  in  dispelling  the  chaos.  The  "arcadian  simplicity  of 
the  early  times"  where  most  railway  bills  before  Parliament  rep- 

*i  They  are  a  sort  of  railway  exchequer  bonds,  representing  what  in  the 
United  States  is  called  a  floating  debt,  which  is  to  be  capitalized  and  paid 
off  sometime  or  other.  They  bear  the  name  of  the  parliamentary  draftsman 
who  originated  them. 

42  29  &  30  V.  c.  108. 


23]  GENERAL   LEGISLATION    ON    RAILWAY   FINANCE  23 

resented  the  enterprise  and  capital  of  a  number  of  bona  fide  in- 
vestors had  long  passed  away.  Instead,  the  "speculative  ele- 
ment" prevailed.  Subscription  of  railway  shares  actually  be- 
came, in  some  cases,  a  process  of  "selling  in  the  market  of  the 
powers  conferred  by  the  Legislature."43  Contractors'  schemes, 
instead  of  railway  corporations,  became  the  center  of  railway 
activity.  These  contractors'  schemes  soon  became  unable  to  sup- 
port their  undertaking,  and  they  had  to  resort  to  the  "finance" 
companies 44  for  help.  As  the  latter  were  nothing  but  paper  cre- 
ations of  credit,  founded  on  works  that  were  not  or  could  not  be 
completed,  and  as  these  finance  companies  themselves  offered  no 
security,  the  result  could  be  readily  foreseen.  Not  only  did  the 
finance  companies  fail  to  bolster  up  the  contractors'  schemes,  but 
they  were  both  dragged  down  to  mutual  ruin.45  Thus  came  the 
terrible  collapse  of  1867.  There  was  so  much  confusion  and  dis- 
trust of  what  was  taking  place  in  the  railway  companies,  "that 
all  which  the  railway  boards  now  say  is  searched  between  the 
lines ;  is  suspected  of  ambiguity  even  when  plain ;  is  taken  in  a 
sense  unfavorable  to  the  railway  when  doubtful ;  is  believed  when 
it  is  against  the  board,  and  disbelieved  when  for  the  board."  48 

The  panic  was  a  bitter,  but  a  beneficial  lesson,  as  a  result  of 
which  several  fundamental  principles  were  evolved.  It  was  real- 
ized 47  that  the  difficulties  were  to  a  great  extent  caused  by  the 
mistaken  view  taken  by  Parliament  originally  in  copying  the 
provisions  of  the  old  canal  bills  for  the  regulation  of  railway 
finance,  without  taking  account  of  the  difference  between  the  se- 
curities issued  by  the  canals  and  those  by  the  railways,  and  with- 
out weighing  the  consequences  of  so  large  an  amount  of  per- 
manent works  being  provided  for  by  a  floating  instead  of  a  fixed 
debt.48  With  the  idea  that  a  railway,  like  a  canal  or  a  turnpike 

is  London  Times,  May  15,  1866. 

4*  These  finance  companies  were  formed  for  the  avowed  purpose  of  pro- 
viding the  capital  which  would  enable  the  contractors  to  carry  on  their 
works.  See  Hansard,  vol.  183,  pp.  857-858. 

45  Ibid. 

46  Economist,  December  21,  1867. 

47  Hansard,  vol.  185,  pp.  784-785. 

48  Under  the  canal  bills,  the  loans  raised  were  precisely  like  mortgages  of 
any  other  landed  estates  and  were  usually  for  seven  or  fourteen  years,  and 
the  total  amount  was  said  to  be  small.    Under  the  railway  bills,  altogether 
over  £120,000,000  had  been  taken  from  the  floating  capital  of  the  country 


24  RAILWAY   FINANCE  IN   ENGLAND  [24 

road,  was  to  be  open  to  all  the  world,  so  that  anybody  might 
place  his  own  engines  and  carriages  on  the  line  and  run  them, 
on  condition  that  he  paid  the  company  certain  tolls  for  the  privi- 
lege, Parliament,  in  granting  a  lien  on  the  tolls,  gave  what  it 
then  considered  to  be  as  good  a  security  as  the  mortgage  on  a 
landed  estate.49  Therefore,  the  security  for  railway  debentures 
was  made  to  cover  only  the  permanent  road-bed  and  the  tolls,  as 
railway  charges  were  then  called,  of  the  undertaking;  and  the 
rolling  stock  was  excluded. 

The  revelations  of  1867  made  clear  the  vast  differences  between 
the  railways  and  the  canals,  and  made  Parliament  realize  the  de- 
sirability of  extending  the  lien  of  railway  debentures  to  the 
rolling  stock  of  the  companies.  Consequently  the  Companies 
Arrangement  and  the  Debenture  Holders  Bill  were  introduced  in 
the  session  of  1867.  After  considerable  deliberation  by  a  special 
committee  the  two  bills  were  fused,  as  they  were,  into  the  Rail- 
way Companies  Bill.  The  purpose  of  the  bill,  as  outlined  by  the 
Duke  of  Richmond,  was  to  give  greater  security  to  railway  prop- 
erty and  to  all  classes  of  shareholders.50 

The  procedure  connected  with  the  passage  of  this  " finance'* 
bill  was  entirely  different  from  that  connected  with  the  bills  of 
former  years.  It  received  a  very  thorough  investigation  in  the 
committee  as  well  as  in  both  houses  of  Parliament.  Indeed,  the 
bill  came  out  from  the  committee  room  in  a  very  different  form 
from  that  in  which  it  was  originally  sent.  The  committee  dis- 
cussed every  clause  in  the  bill  and  had  a  division  upon  almost 
every  one  of  the  clauses.  There  was  so  much  objection  on  all 
sides,  that  "if  all  their  objections  prevailed,  there  would  not  be  a 
single  clause  left  in  the  bill. ' ' 51 

The  bill  received  royal  assent  in  August,  1867,  and  became  the 
Railway  Companies  Act  of  that  year.52  The  novel,  and  by  far 
the  most  important  feature  of  the  Act,  was  the  provision  made 
for  the  protection  of  the  rolling  stock  and  plant  from  seizure, 

under  much  shorter  dated  securities,  which  were  not  mortgages  in  the  usual 
sense  of  the  term  and  could  not  then  be  held  by  trustees.  According  to  IL 
C.  E.  Childer,  Hansard,  vol.  185,  pp.  784-785. 

**l~bid.,  p.  786. 

so  Hansard,  vol.  188,  pp.  489-490. 

si  Hid.,  pp.  157-161. 

52  30  &  31  V.  c.  127. 


25]  GENERAL   LEGISLATION    ON    RAILWAY    FINANCE  25 

thus  affording  additional  security  to  the  debenture-holders  and 
insuring  the  convenience  of  the  public.  Besides  providing  for 
the  creation  and  issue  of  debenture  stock  and  new  capital,  and 
stipulating  the  rules  governing  the  abandonment  of  railways,  the 
act  made  it  possible  for  the  companies  to  adopt  ' '  schemes  of  ar- 
rangement" in  case  they  became  unable  to  meet  their  engage- 
ments.53 

Moreover  for  the  first  time  all  restrictions  upon  the  rate  of  in- 
terest on  debentures  were  removed,  and  henceforth  the  com- 
panies were  given  the  liberty  to  arrange  and  pay  whatever  rate 
of  interest  suited  them  best  instead  of  being  handicapped 
by  the  rate  sanctioned  by  Parliament,  as  had  been  the  case 
before. 

Another  new  provision  introduced  was  that  no  dividends 
should  be  declared  until  all  accounts  of  the  company  were  audit- 
ed and  a  declaration  made  by  the  auditors  to  the  effect  that  the 
proposed  dividends  were  bona  fide. 

Just  about  this  time,  the  Royal  Commission  on  Railways  of 
1865-1867  made  its  report,  in  which  special  attention  was  called 
to  the  importance  of  a  uniform  system  of  accounts  for  the  effec- 
tive regulation  of  railway  finance.  Although  its  work  has  often 
been  regarded  as  a  failure,54  its  conclusions  regarding  the  impor- 
tance of  uniform  accounting  have  proven  sound  and  of  great 
value. 

Almost  simultaneously  with  the  report  of  the  Royal  Commis- 
sion; the  railways  and  the  public  also  became  aware  of  the  great 
importance  of  adopting  some  uniform  system  of  accounts.  Mem- 
bers of  Parliament  began  to  realize  the  inadequacy  of  the  old 
system  which  permitted  each  railway  to  adopt  its  own  system  of 
accounts  and  to  keep  it  in  its  own  way.  This  irregularity  in  ac- 
counting was  recognized  not  only  as  one  of  the  causes  of  the 
panic,  which  was  then  not  yet  over,  but  was  considered  as  unde- 
sirable in  itself.  It  was  quite  generally  recognized 55  that  there 
was  no  cure  for  the  mischief  of  delusion,  nor  any  hope  for  rail- 
way property,  except  by  the  introduction  of  a  principle  of  ac- 
counting in  which  nothing  would  be  admitted  as  profit  but  the 

ss  Hansard,  vol.  189,  p.  159;  also  see  ss.  6-22  of  Act. 
s*  A.  T.  Hadley,  Railroad  Transportation,  1903,  p.  169. 
ss  London  Times,  November  8,  1867,  p.  6. 


26  RAILWAY   FINANCE   IN   ENGLAND  [26 

surplus  of  actual  receipts  over  actual  expenditures.  Consequent- 
ly much  agitation  took  place.  A  number  of  bills 5<J  for  the  regu- 
lation of  railway  accounts  were  introduced  into  Parliament  as  a 
result  of  which  the  Regulation  of  Railways  Bill,  1868,  was  pre- 
pared and  introduced  by  the  Board  of  Trade.  In  preparing  this 
bill,  the  Board  of  Trade  not  only  gave  careful  consideration  to 
the  recommendations  of  the  Royal  Commission  on  Railways  and 
took  advantage  of  the  experience  of  the  previous  years,  but  con- 
sulted frequently  a  number  of  railway  accountants  and  other  ex- 
perts. Parliament  also  gave  the  measure  unprecedented  atten- 
tion. It  no  longer,  for  the  time  being  at  least,  had  any  fear  of 
general  and  sentimental  opposition  to  sane  measures  on  this  sub- 
ject. The  only  question  before  it,  therefore,  was  what  should  be 
done  to  restore  to  railways  their  lost  confidence  and  what  meas- 
ures should  be  adopted  to  prevent  future  malversation  in  railway 
finance.57 

Under  such  favorable  circumstances,  the  bill  received  unusual- 
ly careful  consideration  instead  of  the  former  party  quibbles, 
and  obtained  royal  assent  in  July,  1868.  Henceforth  all  railway 
companies  were  required  to  prepare  and  present,  semi-annually, 
a  statement  of  accounts  and  balance  sheets  according  to  the 
forms  perscribed.  The  officers  were  subjected  to  severe  penalty 
for  falsifying  such  accounts  or  statements.  A  system  of  gov- 
ernment inspection  and  audit  was  also  adopted. 

The  part  of  the  act  dealing  with  accounts  and  audit  was  at 
once  recognized  as  of  a  novel  nature,  and  hence  received  much 
discussion.58  In  spite  of  the  fact  that  the  act  contained  seven 
parts,  of  which  only  one  dealt  with  accounts  and  auditing,  it  has 
been  called,  with  good  reason,  an  accounting  act.  Although  the 
general  usefulness  of  a  uniform  system  of  accounts  was  felt,  the 
true  import  of  such  a  system  was  not  fully  recognized.  Much 
less  was  it  recognized  that  this  measure  was  to  be  the  culmination 
of  a  century's  work  in  legislation  on  railway  finance.  Neverthe- 
less, this  was  the  case.  With  the  exception  of  the  enactment  of 
the  Railway  Regulation  Act,  1871,59  dealing  with  railway  statis- 

ss  The  Eailway  and  Joint  Stock  Companies  Account  Bill  and  the  Com- 
panies Audit  of  Accounts  Bill,  etc. 
57  Hansard,  vol.  191,  p.  1536. 
ss  Economist,  March  21,  1868. 
59  34  &  35  V.  c.  78. 


27]  GENERAL   LEGISLATION    ON    RAILWAY    FINANCE  27 

tics,  and  the  insertion,  since  1890,  of  some  special  clauses  in  the 
special  acts  governing  the  watering  of  stocks,  no  general  legisla- 
tive measure  has  been  adopted  since.  Even  the  somewhat  anti- 
quated requirement  of  semi-annual  accounts  as  well  as  the  forms 
of  these  accounts  adopted  prior  to  1871  have  been  in  use  until 
very  recently.  The  system  of  accounts  had,  indeed,  for  some 
time  been  recognized  as  inadequate  and  a  departmental  commit- 
tee with  a  number  of  well  known  economists,  statisticians,  and 
accountants  as  members,  recommended  in  1909  its  modification. 
A  bill  was  actually  introduced  to  give  effect  to  the  committee's 
recommendation,  but  nothing  had  been  done  until  1911  when  a 
new  accounts  act  was  passed.60  Hence  with  little  qualification, 
we  may  say  that  English  legislation  on  railway  finance  was 
closed  by  the  passage  of  the  Railway  Regulation  Act,  1871,  and 
with  the  exception  of  accounting  what  guides  England  to-day  in 
regulating  the  financial  affairs  of  her  railways  is  exactly  what 
guided  her  four  decades  ago. 

To  describe  briefly  the  present  scope  of  English  legislative 
control  of  railway  finance,  we  may  say  that  before  incorporation, 
the  entrepreneurs  are  required  to  produce  sufficient  evidence  that 
all  the  proposed  share  capital  has  been  subscribed  for  by  bona 
fide  investors  and  that  a  deposit  varying  from  5  to  10  per  cent 
of  the  total  estimated  cost  of  the  undertaking  has  been  made. 
The  conditions  under  which  the  share  capital  may  be  raised  and 
the  privileges  and  responsibilities  of  the  subscribers,  as  well  as 
the  rules  governing  the  issue,  cancellation,  and  surrender  of  such 
shares  are  prescribed  in  detail.  Preference  shares  with  a  fixed 
rate  of  dividend  may  be  issued  according  to  the  regulations  laid 
down  by  Parliament,  and  ordinary  shares  may  be  "split"  into 
preferred  and  deferred  portions  under  certain  conditions.  Stock- 
watering  is  permitted,  but  it  must  be  done  in  the  open,  and  a 
record  of  such  operations  must  be  made  in  the  company's  ac- 
counts. 

The  companies  are  given  power  to  borrow  on  mortgage  to  the 
extent  of  one-fourth  of  their  total  paid  up  capital.  But  such 
borrowing  powers  are  not  to  be  exercised  until  all  the  shares  of 
the  company  are  taken  and  one-half  of  the  total  on  such  shares 
has  been  paid  up.  Only  the  securities  issued  within  the  statu- 

-      GO  1  &  2  Geo.  V,  Cap.  34. 


28  RAILWAY   FINANCE  IN   ENGLAND  [28 

tory  limits  are  regarded  as  legal  securities,  to  enjoy  the  special 
privileges  given  by  law  to  mortgages. 

In  incorporation  and  in  raising  additional  capital,  the  com- 
panies are  required  to  state  in  each  and  every  case  the  purpose 
for  which  money  is  raised,  and  they  are  prohibited  from  apply- 
ing any  money  so  raised  to  purposes  other  than  those  approved 
by  Parliament. 

Annual  accounts  of  all  the  incomes  and  expenditures  are  to  be 
kept  according  to  the  uniform  system  of  accounts  adopted  in 
1868,  as  revised  in  1911,  and  annual  statistical  returns  must  be 
made  to  the  Board  of  Trade  according  to  the  rules  prescribed  in 
the  Railway  Regulation  Act  of  1871  and  the  Railway  Companies 
(Accounts  and  Returns)  Act  of  1911.  Government  audit  and 
inspection  of  the  company's  affairs  may  be  resorted  to  under 
certain  special  circumstances. 

Aside  from  these  restrictions,  the  English  railways  are  per- 
mitted to  do  as  they  please  in  managing  their  financial  matters, 
subject  to  the  common  law  of  the  country.  But  Parliament  has 
power  to  pass  any  general  law  governing  railway  finance  as  it 
sees  fit.  Railway  companies  may  change  their  original  terms  of 
incorporation,  or  vary  the  conditions  under  which  their  capital 
may  be  raised  or  spent,  or  effect  any  other  modifications  regard- 
ing financial  affairs;  but  in  each  and  every  case,  they  are  re- 
quired to  apply  to  Parliament  for  special  permission.61 

England,  we  have  stated,  undertook  to  regulate  railway  finance 
long  before  some  other  countries  realized  the  importance  of  this 
branch  of  government  activity.  Thus,  it  may  well  be  asked  in 
the  beginning,  (1)  Why  did  England  deem  such  actions  neces- 
sary? and  (2)  what  led  her  to  adopt  her  unique  policy?  The 
first  question  may  be  answered  by  stating  that  England  has  long 
recognized  that  public  advantage  requires  that  railways  should 

6i  In  practice,  the  permission  can  usually  be  obtained  without  any  diffi- 
culty, if  there  is  no  serious  opposition.  The  following  passage  from  an 
editorial  of  the  Economist,  April  9,  1870,  to  a  large  extent  expresses  the 
situation : 

The  "position  (of  Parliament)  towards  applicants  for  powers  is  very 
simple.  It  is  the  mere  dispenser  of  an  authority  which  the  applicants  wish 
to  possess,  and  which  it  confers  upon  them  in  order  that  the  country  may 
gain.  Both  parties  are  quite  free  in  the  matter.  The  companies  to  make  a 
profit  apply  for  the  power,  and  Parliament  believing  that  its  constituents 
will  gain,  assents  to  the  demand." 


29]  GENERAL   LEGISLATION    ON    RAILWAY   FINANCE  29 

yield  reasonable  returns  to  those  who  invest  in  such  undertak- 
ings and  that  a  certain  amount  of  government  interference  is 
required  to  help  investors  to  identify  the  securities  issued  by 
railway  companies,  which  they  are  asked  to  take  up.  To  raise 
a  sufficient  barrier  against  swindling  operations  and  to  protect 
the  public  from  "bubble"  schemes,  seem  to  be  objects  underly- 
ing all  the  legislative  actions  of  Parliament. 

In  answer  to  the  second  question  as  to  why  Parliament  has 
adopted  its  particular  policy  in  regulating  railway  finance,  it 
may  be  said  that  although  Parliament  attempted  to  adopt  more 
stringent  measures  for  realizing  the  purposes  just  referred  to,  it 
was  constantly  reminded  of  the  fact  that  England  is  a  country 
of  free  enterprise.  The  general  principle  was  well  established 
that  the  state  should  interfere  as  little  as  possible  with  what  is 
being  or  is  capable  of  being  performed  by  private  enterprise. 
There  has  been  even  considerable  cry  that  "the  cost  of  a  railway 
is  a  matter  with  which  the  public  and  Parliament  have  no  con- 
cern. ' ' 62  The  idea  that  an  enlightened  view  of  their  own  in- 
terest would  always  compel  railway  officers  to  have  due  regard 
to  the  general  advantage  of  the  public  has  always  been  kept 
prominently  before  the  attention  of  the  government.  More- 
over, Parliament  is  an  elective  body,  and  has  consequently  been 
influenced  by  popular  conceptions  in  dealing  with  such  scientific 
questions  as  the  regulation  of  railway  finance. 

Moreover,  by  the  time  Parliament  had  fully  realized  the  im- 
portance of  more  strict  regulation,  its  laissez  faire  rules  had 
been  established,  and  an  enormous  amount  of  capital  already 
invested  in  the  railway  business.  Parliament  therefore  felt  that 
it  would  be  unjust  to  withdraw  in  any  way  the  early  conces- 
sions which  led  to  the  investments.  The  constant  desire  to  make 
railway  investments  safe  securities  on  the  one  hand  and  to  in- 
terfere with  railway  management  as  little  as  possible  on  the  oth- 
er, seems  to  have  caused  Parliament  to  adopt  its  unique  system 
of  regulation  of  railway  finance  which  seems  to  differ  from  that 
of  all  other  countries. 


62  London  Times,  June  4,  and  June  12,  1886. 


CHAPTER  II 

LEGISLATIVE  SUPERVISION  OF  CAPITALIZATION 
A  — SHARE  CAPITAL 

The  greater  part  of  English  railway  capital  is  raised  by  the 
issue  of  three  classes  of  instruments/  varying  in  security  and 
interest  The  net  income  is  liable  in  the  first  instance  to  the 
claims  of  the  debenture  holders,  then  to  tho.se  of  the  holders  of 
preference  shares,  and  ultimately  to  those  of  the  holders  of  or- 
dinary shares.2 

In  general  a  railway  raises  its  capital  in  the  first  instance  by 
issuing  ordinary  shares.  When  this  class  falls  to  a  discount,  or 
for  some  other  reason,  the  company  has  recourse  to  inviting 
subscriptions  to  preference  or  guaranteed  shares.  The  holders 
of  the  latter  class  of  stocks  are,  to  a  certain  extent,  not  only 
proprietors  but  semi-creditors  of  the  company,  in  that  the  net 
income  of  the  company  is  first  of  all  secured  to  them  in  priority 
over  the  ordinary  stock  holders.  When  the  ordinary  and  pref- 
erence stock  are  both  taken  up  and,  theoretically,  paid  for  in 
cash  to  the  amount  of  the  nominal  value,  then  the  company  may 
use  its  authority,  granted  by  Parliament,  to  borrow  money  on  de- 
benture, mortgage,  or  otherwise,  to  the  extent  of  one-third  of 
the  amount  raised  by  shares  or  one-fourth  of  the  total  capital.3 

Among  the  several  important  features  into  which  the  parlia- 

1  Formerly  railway  securities  were  divided  into  five  classes:    ordinary, 
guaranteed,  preferential,  loans,  and  debenture  stock.     About  1870,  the  sec- 
ond and  third  classes  as  well  as  the  fourth  and  fifth  classes  were  merged. 
In   addition  to  these  principal  classes,   there  are  also  various  subordinate 
issues  such  as  rent  charge  stocks  which  are  practically  guaranteed  stocks, 
and  preferred  and  deferred  stocks.     The  latter  two,  however,  are  but  com- 
ponents of  the  ordinary  stock.     There  is  another  very  rare  class  (according 
to  Wm.  J.  Stevens,  British  Railways,  p.  4),  called  the  contingent  right  stock 
which  shares  in  dividends  with  the  ordinary  stock  after  a  certain  rate  on 
the  latter  has  been  paid. 

2  See  London  Times,  August  27,  1871. 

3  Cf.  John  Fraser,  British  Eailroads,  1903,  pp.  26-27. 

30 


31]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  31 

mentary  committee  on  railway  bills  would  make  inquiry  before 
recommending  the  passage  of  such  bills  were  the  financial  affairs 
of  the  applying  company.4  They  would  scrutinize,  first  of  all, 
the  amount  of  the  capital  to  be  raised  by  the  company,  whether 
by  the  creation  of  shares  or  by  loans.  Thus  besides  considering 
the  location  and  nature  of  the  line,  special  engineering  difficul- 
ties, expected  traffic,  etc.,  the  committee  on  railway  bills  in  18M, 
as  in  the  case  of  the  Brighton  and  Chichester  Railway,  considered 
carefully  the  following  questions : 5 

1.  The  amount  of  the  proposed  capital  and  the  amount  of 
loans  to  be  raised. 

2.  The  amount  of  shares  subscribed  for  and  the  deposits  paid 
thereon. 

3.  The  names  and  places  of  residence  of  the  directors  with 
the  amount  of  shares  taken  by  each. 

4.  The  number  of  shareholders  who  might  be  considered  as 
having  a  local  interest  in  the  line,  and  the  amount  of  capital 
subscribed  by  them,  together  with  their  names  and  addresses. 

5.  The  number  of  other  shareholders  and  the  capital  taken 
by  them. 

It  was  only  after  being  satisfied  with  respect  to  these  points 
as  set  forth  in  the  bill,  that  the  committee  would  recommend 
its  passage.  The  manner  in  which  these  provisions  governing 
share  capital  of  railway  companies  were  embodied  in  the  special 
acts  is  illustrated  by  the  following  passages  from  the  London  and 
Croydon  Railway  Act  of  1837 : 6 

"CXXXVI.  And  whereas  the  probable  expense  of  making 
the  railway  and  other  works  hereby  authorized  will  amount  to 
the  sum  of  £1,800,000,  and  sums  exceeding  that  amount  have  been 
subscribed  under  the  subscription  contracts  .  .  . ;  be  it  en- 
acted, That,  notwithstanding  any  thing  in  the  several  subscrip- 
tion deeds  or  contracts  .  .  .,  the  capital  of  the  company  here- 
by incorporated  shall  be  £1,800,000  divided  into  36,000  shares  of 
£50  each;  and  that  such  shares  shall,  as  soon  as  conveniently 
may  be  after  the  passing  of  this  act,  be  apportioned  and  di- 
vided to  and  amongst  the  several  provisional  Committees  or  pro- 
visional Directors  .  .  .,  in  the  proportion  herein-before  men- 
tioned. .  ." 

The  act  further  permitted  the  company  to  increase  the  num- 
ber of  shares  by  diminishing  the  amount  in  value  of  each  share 

4  Railway  Times,  October  5,  1839. 

s  Ibid.,  April  25,  1844. 

6  Hereafter  called  the  Croydon  Railway  Act. 


32  RAILWAY   FINANCE   IN   ENGLAND  [32 

in  order  to  facilitate  the  allotment  of  such  shares  among  the 
subscribers. 

As  these  clauses  became  numerous  and  complicated  Parliament 
consolidated  them  and  a  number  of  other  provisions  into  gen- 
eral provisions  to  be  applicable  to  all  companies.  Thus  in  the 
Companies  Clauses  Act,  1845,  provisions  were  made  to  the  effect 
that  the  capital  of  the  companies  should  be  divided  into  shares 
of  the  prescribed  number  and  amount  and  that  such  shares 
should  be  numbered  in  arithmetical  progression.7  All  the  pro- 
visions as  being  outlined  in  the  private  act  just  referred  to  were 
also  set  forth  with  precision.  Further  provision  was  made  to 
enable  railway  companies  to  convert  their  borrowed  money  into 
share  capital  under  certain  conditions.8 

In  England,  as  in  other  countries,  the  railways  were  given 
compulsory  power  to  take  land;  but  they  were  not  allowed  to 
exercise  such  power  until  they  produced  a  certificate  under  the 
hands  of  two  justices  certifying  that  the  whole  of  the  capital  or 
estimated  sum  for  defraying  the  expenses  of  the  undertaking 
had  been  subscribed  under  contract  binding  upon  the  subscrib- 
ers.9 Companies  were  also  forbidden  to  reduce  their  capital  by 
the  payment  of  dividends ; 10  but  they  might  reduce  their  capital 
in  case  the  commissioners  of  railways  authorized  the  abandon- 
ment of  a  part  of  their  undertaking  and  the  commissioners  fav- 
ored such  a  reduction  of  capital.11 

As  has  been  referred  to,  the  Companies  Clauses  Act  of  1845 

7  Companies  Clauses  Act,  1845,  8  V.  cap.  16. 

8  "  56.    It  shall  be  lawful  for  the  company,  if  they  think  fit,  unless  it  be 
otherwise  provided  by  the  special  act,  to  raise  the  additional  sum  so  author- 
ized to  be  borrowed,  or  any  part  thereof,  by  creating  new  shares  of  the 
company,  instead  of  borrowing  the  same,  or  having  borrowed  the  same,  to 
continue  at  interest  only  a  part  of  such  additional  sum,  and  to  raise  part 
thereof  by  creating  new  shares;  but  no  such  augmentation  of  capital    .    .    . 
shall  take  place  without  the  previous  authority  of  a  general  meeting  of  the 
company. 

"57.  The  capital  so  to  be  raised  by  the  creation  of  new  shares  shall  be 
considered  a  part  of  the  general  capital,  and  shall  be  subject  to  the  same 
provisions  in  all  respects,  whether  with  reference  to  the  payment  of  calls, 
or  the  forfeiture  of  shares  on  nonpayment  of  calls,  or  otherwise,  .  .  . " 

9  Lands  Clauses  Act,  1845,  8  V.  cap.  18,  ss.  16-17. 

10  Companies  Clauses  Act,  1845,  s.  121. 

11  Abandonment  of  Railways  Act,  1850,  13  &  14  V.  cap.  83,  s.  28. 


33]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  33 

required  that  the  capital  of  the  companies  should  be  divided  into 
shares  of  the  prescribed  number  and  amount.  The  holders  of 
the  shares  were  entitled  to  enjoy  the  proprietary  privileges  ac- 
cording to  the  number  of  shares  owned,12  and  were  at  liberty  to 
transfer  their  shares.  A  provision,  however,  was  inserted  in  the 
Companies  Clauses  Bill,  1845,  to  the  effect  that  no  shareholder 
should  make  any  transfer  of  shares  in  respect  of  his  subscription 
until  he  had  paid  all  calls  for  the  time  being  due  on  such  shares 
held  by  him. 

This  provision  met  with  much  opposition  in  Parliament.  It  was 
objected  to  on  the  ground  that  it  was  not  only  too  hard  a  meas- 
ure, but  it  would  prevent  the  solvent  shareholder  from  disposing 
of  his  shares  until  all  the  calls  were  paid  up,  thus  giving  an  ad- 
vantage to  the  insolvent  holders,  as  it  did  not  matter  much  to  the 
latter  whether  he  effected  a  transfer  or  not.  It  was  contended 
that  a  call  might  be  made  for  a  particular  day,  and  it  would  not 
be  proper  to  prohibit  the  transfer  of  shares  in  the  interim.13 

To  this  objection,  it  was  retorted  that  a  call  once  made  would 
form  a  debt,  and  hence  should  be  settled  first.  It  was  further 
urged  that  the  adoption  of  the  clause  would  put  an  end  to  the 
extremely  harmful  practice  of  railway  speculation  which  was 
very  common  at  the  time.  These  speculators,  it  was  pointed  out, 
would  often  enter  into  engagements  without  the  least  probability 
of  their  ever  being  able  to  meet  them;  and  when  they  became 
deeply  involved  for  calls,  they  would  shake  off  their  responsibil- 
ity by  transferring  their  shares  to  men  of  straw.  Thus  after 
considerable  discussion,  the  clause  was  agreed  to.14 

Further  provisions,  however,  were  made  in  the  early  special 
acts,  to  the  effect  that  transfers  of  shares  and  stocks  should  be 
made  by  deed  and  should  be  registered  in  the  registers  of  the 
companies  concerned,  and  that  until  such  registration  was  made, 

12  On  account  of  the  fact  that  many  people  subscribed  to  shares  without 
any  idea  of  ever  paying  for  them,  a  provision  was  made  in  the  Railway  Con- 
struction Facilities  Act  of  1864  (27  &  28  V.  cap.  121,  s.  28)  to  render  it 
unlawful  for  any  company  to  issue  any  share  created  under  the  authority  of 
a  certificate  of  the  Board  of  Trade  nor  should  any  such  share  vest  in  the 
person  accepting  the  same,  unless  and  until  a  sum  not  less  than  one-fifth 
part  of  the  amount  of  such  share  had  been  paid  up. 

is  Hansard,  vol.  77,  p.  929. 

i*  Ibid. 


34  RAILWAY   FINANCE   IN   ENGLAND  [34 

the  seller  of  the  share  should  remain  liable  for  all  the  calls  and 
the  purchaser  should  have  no  part  or  share  of  the  profits  of  the 
undertaking,  nor  any  voting  power  in  respect  of  such  trans- 
ferred shares.15  Forms  of  certificates  of  both  shares  and  trans- 
fers of  shares  were  also  prescribed. 

So  far  so  good ;  but  Parliament  seemed  to  have  failed  at  the 
most  important  point.  It  did  not  stipulate  the  time  within  which 
such  registration  should  be  executed.  When  the  prospects  of  a 
company  were  good,  the  proviso  that  failure  to  register  would 
deprive  the  purchaser  of  his  proprietary  privileges  was  sufficient 
to  insure  proper  expeditious  registration,  but  when  the  pros- 
pects of  a  company  were  bad,  it  was  entirely  different.  Conse- 
quently, purchasers  of  railway  shares  often  would  hold  the  trans- 
fer in  their  possession  so  long  as  it  suited  their  convenience; 
the  seller  of  those  shares  having  no  means  of  compelling  the 
purchasers  to  register  the  share,  would  remain  always  liable  for 
the  payment  of  the  calls.  The  law  subjected  these  sellers  to  the 
liability  of  paying  calls,  but  afforded  them  no  means  of  repos- 
sessing themselves  of  their  shares.16  Consequently  the  original 
holders  having  disposed  of  their  shares  in  the  market  and  after 
the  lapse  of  years  when  call  upon  call  had  accumulated  to  a 
frightful  amount,  were  sometimes  subjected  to  legal  proceedings, 
''because  none  of  the  many  parties  through  whose  hands  these 
shares  had  subsequently  passed  had  chosen  to  render  themselves 
liable  by  conforming  with  the  requirements  of  the  company's 
act"17  The  brokers  also  took  advantage  of  this  unfortunate 
situation  by  arranging  schemes  whereby  it  was  made  possible 
that  from  the  moment  the  deed  was  stamped  for  the  first  time, 
the  transfer  should  pass  from  hand  to  hand  possibly  for  many 
months  without  the  payment  of  any  duty  upon  the  several  trans- 
actions subsequent  to  the  first.18 

The  inconvenience  resulting  from  such  illegal  transfer  of 
shares  was  seriously  felt.19  Therefore,  it  was  urged,  before  the 

is  Companies  Clauses  Act,  1845,  ss.  14-15,  and  s.  CLV  of  the  Croydon 
Railway  Act,  1837. 

is  Evidence  before  the  select  Committee  of  the  House  of  Commons,  1839. 
Railway  Times,  November  9,  1839. 

17  Railway  Times,  November  9,  1839. 

is  Second  Beport  of  select  committee  of  the  House  of  Commons,  as  ap- 
peared in  Railway  Times,  October  5,  1839. 

i»  Railway  Times,  November  9,  1839. 


35]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  35 

select  committee  of  1839  that  some  measure  should  be  adopted 
to  limit  the  period  within  which  transfers  of  shares  and  stocks 
should  be  registered.20  It  was  also  suggested  that  unless  regis- 
tration was  made  within  the  specified  time,  the  transfer  should 
lose  its  validity  and  the  share  should  revert  to  the  selling  party.21 
No  action,  however,  was  taken  by  Parliament  to  effect  these  re- 
forms. But  in  1850,  a  provision  was  made  in  the  Abandonment 
of  Railways  Act  of  that  year,22  again  providing  that  unless  a 
share  had  been  duly  registered  and  calls  on  it  fully  paid,  it 
would  not  entitle  its  holder  to  the  proprietary  privileges.  No 
provision,  however,  was  made  to  stipulate  a  uniform  limit  of 
time  within  which  such  registration  should  take  place.  Hence 
the  regulations  governing  the  registration  of  transfer  of  shares 
remained  as  defective  as  before,  and  nothing  further  has  been 
done  since. 

The  payment  of  calls  also  received  much  consideration  in  1845. 
Companies  were  empowered  by  the  Companies  Clauses  Act  of 
that  year 23  to  make  calls  for  the  payment  of  money  upon  the 
shareholders  by  serving  on  each  shareholder  a  notice  at  least 
twenty-one  days  before  making  the  call ;  but  no  successive  calls 
should  be  made  at  less  than  the  prescribed  intervals.  The  ag- 
gregate amount  of  calls  made  in  any  one  year  was  also  pre- 
scribed. Every  shareholder  was  held  liable  to  pay  the  amount 
of  the  calls  made  in  respect  of  his  shares ;  and  in  case  of  failure 
to  pay  such  calls  on  or  before  the  proper  time,  he  should  be 
liable  to  be  charged  with  interest  for  such  unpaid  calls  at  the 
legal  rate.  The  railway  companies  were  further  empowered  to 
sue  and  recover  with  interest  from  such  defaulting  shareholders 
the  amounts  of  the  calls  due,  for  which  purpose  the  production 
of  the  register  of  shareholders  was  prima  facie  evidence  of  such 
defaulting  parties  being  shareholders  of  the  company  and  of  the 
number  and  amount  of  their  registered  shares. 

Moreover,  the  directors  after  serving  proper  notice  might  at 
any  time  after  the  expiration  of  two  months  from  the  day  ap- 
pointed for  payment  of  such  calls,  declare  the  forfeiture  of  such 
defaulted  shares  on  which  calls  were  due  and  unpaid.  After 

20  Ibid. 

21  Ibid. 

22  13  &  14  V.  cap.  83,  s.  6. 

23  8  V.  c.  16,  21-28. 


36  RAILWAY   FINANCE   IN   ENGLAND  [36 

such  declaration  of  forfeiture  being  confirmed  by  a  general  meet- 
ing the  company  might  sell  such  forfeited  shares.24  To  safe- 
guard the  interest  of  the  shareholders,  however,  it  was  provided 
that  no  25  company  should  sell  or  transfer  more  of  the  shares  of 
any  such  defaulters  than  was  sufficient  to  pay  the  arrears,  etc., 
then  due  from  them.  In  case  the  money  produced  by  any  such 
sale  was  more  than  what  was  needed  to  pay  for  such  arrears, 
interests,  etc.,  the  defaulters  might  claim  the  surplus. 

The  matter  of  cancellation  and  surrender  of  shares  was  fur- 
ther amplified  by  the  Companies  Clauses  Act,  1863,26  so  as  to  give 
the  companies  greater  liberty  in  such  matters  and  to  make  the 
payment  of  calls  of  even  greater  consequence  to  the  sharehold- 
ers.27 

Provision  was  also  made  to  the  effect  that  the  last  registered 
holders  of  such  forfeited  shares  should  not  only  be  precluded 
from  all  rights  and  interest  in  respect  of  such  shares,  but  should 
also  be  held  liable  to  pay  all  arrears  of  calls,  interest,  and  ex- 
penses due  in  respect  of  the  share  at  the  time  of  the  cancellation, 
notwithstanding  such  forfeiture.28 

Moreover,  companies  were  authorized  to  cancel  forfeited  shares 
with  the  consent  of  holders  and  to  accept,  on  such  terms  as  they 
saw  fit,  surrenders  of  any  shares  which  were  not  fully  paid  up ; 
but  they  were  forbidden  to  "pay  or  refund  to  any  shareholder 
any  sum  of  money  for  or  in  respect  of  the  cancellation  or  sur- 
render of  any  shares. ' ' 29 

24  Ibid.,  ss.  29-33. 

25  Ibid.,  ss.  34-35. 

26  26  &  27  V.  e,  118,  s.  4. 

27  Section  four  of  this  act  provides:    "Where  any  share     ...     is  after 
the  passing  of  this  act  declared  forfeited  under  and  in  pursuance  of  the  pro- 
visions   ...     in  The  Companies  Clauses  Consolidation  Act,  1845,     .     .     . 
and  the  forfeiture  is  confirmed  by  a  meeting  in  accordance  with  the  same 
provisions,     .     .     .     and  notice  of  the  forfeiture  has  been  given,  —  then, 
.     .     .     if  the  directors  of  the  company  are  unable  to  sell  the  share  for  a 
sum  equal  to  the  arrears  of  calls  and  interest  and  expenses  due  in  respect 
thereof,  the  company  at  any  general  meeting  held  not  less  than  two  months 
after  such  notice  is  given  may,  in  ease  payment  of  arrears  of  the  calls,  in- 
terest and  expenses  due  in  respect  thereof  is  not  made  by  the  registered 
holder  of  the  share  before  the  meeting  is  held,  resolve  that  the  share  instead 
of  being  sold  shall  be  cancelled,  and  the  share  shall  thereupon  be  cancelled 
accordingly. ' ' 

28  26  &  27  V.  c.  118,  8.  6. 

29  26  &  27,  c.  118,  s.  10. 


37]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  37 

When  a  railway  company  desired  to  raise  additional  capital, 
it  should  apply  to  the  Board  of  Trade  for  permission,30  and  the 
latter  after  being  satisfied  that  the  applying  company  had  com- 
plied with  the  requirements  of  the  established  rules  governing 
notices,  etc.,  might  settle  a  "draft  of  certificate"  to  authorize 
the  company  to  raise  the  prescribed  amount  of  additional  capi- 
tal for  the  purpose  set  forth  in  the  certificate.  For  the  purpose 
of  raising  such  additional  capital,  the  company  was  at  liberty 
to  issue  new  shares  or  stock  or  to  make  loans,  unless  the  certifi- 
cate provided  to  the  contrary.31  New  shares  or  stocks  issued  un- 
der such  circumstances,  or  for  the  conversion  of  its  loans  into 
share  capital,  as  well  as  for  raising  additional  sums  of  money  in 
lieu  of  borrowing  should  be  considered  as  a  part  of  the  general 
capital  and  should  be  subjected  to  the  same  provisions  in  all 
respects  as  the  existing  shares,  except  as  to  the  time  for  making 
calls  and  the  amounts  of  such  calls,  which  the  company  was  au- 
thorized to  determine  as  it  saw  fit  from  time  to  time.32 

In  order  to  safeguard  the  interests  of  the  shareholders,  it  was 
provided  by  the  Companies  Clauses  Act  of  1845  33  that  if  at  the 
time  when  the  augmentation  of  capital  took  place  the  existing 
shares  were  at  or  below  par,  the  new  shares  might  be  of  such 
amount  and  issued  in  such  a  manner  as  the  directors  saw  fit,  but 
that  if  at  the  time  of  the  augmentation  the  existing  shares  were 
at  a  premium,  then,  unless  it  was  otherwise  provided  by  the 
special  act  of  the  company,  the  sum  to  be  raised  should  be  di- 
vided into  shares  of  such  amount  as  would  conveniently  allow 
the  same  to  be  apportioned  among  the  shareholders  in  proportion, 
to  the  existing  shares,  and  such  new  shares  should  be  offered  to 
the  existing  shareholders  in  the  proper  proportion  by  letter. 

The  latter  provision,  beneficial  as  it  was  to  the  shareholders, 
seemed  to  have  been  more  or  less  abused  by  .some  of  the  share- 
holders through  their  neglect  in  acknowledging  their  acceptance 
of  such  offers.  Consequently,  a  similar  provision  was  made  in 
the  Companies  Clauses  Act,  1863,34  with  the  proviso  that  in  case 
the  company's  offer  to  any  shareholder  was  not  accepted  within 

30  Eailway  Companies  Act,  1864,  27  &  28  V.  cap.  120,  s.  3. 
si  Ibid.,  s.  4  and  Schedule  iii. 

32  Companies  Clauses  Act,  1863,  26  &  27  V.  cap.  118,  s.  12,  and  Com- 
panies Clauses  Act,  1845,  8  V.  cap.  16,  ss.  56-57. 

33  Companies  Clauses  Act,  1845,  8  V.  cap.  16,  sa.  58-60. 
s*  26  &  27  V.  cap.  118,  ss.  17-21. 


38  RAILWAY   FINANCE   IN   ENGLAND  [38 

the  time  limit  and  in  the  absence  of  any  special  arrangement  to 
extend  such  time  limit,  then  the  company  might  dispose  such 
new  shares  and  stocks  in  whatever  way  it  saw  fit,  "but  so  that 
not  less  than  the  full  nominal  amount  of  any  share  or  portion 
of  stock  be  payable  or  paid  in  respect  thereof."  The  latter  pro- 
vision prohibiting  the  disposal  of  shares  at  a  discount,  however, 
was  repealed  afterwards. 

In  several  of  the  bills  of  the  session  of  1859  and  1862,  power 
was  sought  to  accept  surrenders  of  shares  liable  to  be  forfeited, 
and  to  extinguish,  without  sale,  the  interest  of  the  holders  of 
shares  which  had  become  forfeited,  and  thereupon  to  cancel  or 
merge  the  surrendered  and  forfeited  shares,  and  in  lieu  of  such 
cancelled  shares  to  issue  new  shares  to  an  aggregate  amount,  lim- 
ited in  some  cases  to  that  remaining  unpaid  in  respect  of  the 
cancelled  or  merged  shares,  and  in  others  extending  to  the  ag- 
gregate amount  of  the  whole  of  the  cancelled  or  merged  shares.35 
The  Board  of  Trade  thought  that  such  irregularities  were  unde- 
sirable, and  during  those  years  repeatedly  urged  that  the  aggre- 
gate amount  of  the  new  shares  which  might  be  issued  in  lieu  of 
the  old  shares  should  in  all  cases  be  restricted  to  the  aggregate 
amount  remaining  unpaid  in  respect  of,  the  cancelled  or  merged 
shares,  so  that  the  sums  which  had  been  already  raised  by  means 
of  the  old  shares  might  not  be  raised  a  second  time.  It  believed 
that  if  further  sums  were  required  for  the  companies'  undertak- 
ing, it  would  be  better  that  authority  to  raise  them  should  be 
sought  as  a  power  to  raise  additional  capital,  for  by  so  doing  the 
nominal  capital  of  the  company  would  correspond  with  the 
amount  which  the  company  would  have  been  authorized  to  raise 
by  shares  if  the  cancellation  or  merging  did  not  take  place.36 

Following  these  repeated  recommendations  of  the  Board  of 
Trade,  Parliament  inserted  a  clause  in  the  Companies  Clauses 
Act,  1863,3T  to  the  effect  that  the  companies  might  issue  new 
shares  in  lieu  of  cancelled  or  surrendered  shares ;  but  the  aggre- 
gate nominal  amount  of  such  new  shares  should  not  exceed  that 
of  the  old  shares  after  deducting  the  amount  actually  paid  up 
in  respect  of  such  old  shares. 

ss  Report  of  Board  of  Trade  on  Railway  Bills,  1861,  pp.  22-23. 

se  Hid. 

ST  26  &  27  V.  c.  118,  s.  11. 


39]  LEGISLATIVE   SUPERVISION   OF    CAPITALIZATION  39 

By  the  same  act,38  railway  companies,  after  having  created 
new  shares  or  stock,  were  permitted  to  cancel  such  new  shares  or 
stock  should  they  decide  not  to  issue  the  whole  of  such  new 
shares. 

As  stated  above,  between  the  ordinary  shares  and  the  deben- 
tures or  loans  of  a  company  are  the  preference  shares.  The  lat- 
ter bears  a  specified  rate  of  dividend  which  shall  be  met  out  of 
the  company's  net  income  before  any  ordinary  shareholder  may 
receive  any  dividend.  Prior  to  1863,  the  interest  or  guaranteed 
dividend  on  these  preferential  shares  was  cumulative.  If  it  is 
not  paid  in  one  year,  then  it  must  be  paid  together  with  the 
dividend  due  in  the  succeeding  year  in  full,  before  the  ordinary 
stocks  could  receive  anything.  But  in  the  Companies  Clauses 
Act,  1863,39  a  provision  was  inserted  to  the  effect  that  preference 
shares  should  be  entitled  to  dividends  only  out  of  the  profits  of 
each  year;  and  if  any  year  ending  on  the  31st  of  December, 
''there  are  not  profits  available  for  the  payment  of  the  prefer- 
ential dividend  .  .  .  for  that  year,  no  part  of  the  deficiency 
shall  be  made  good  out  of  the  profits  of  any  subsequent  year,  or 
out  of  any  other  funds  of  the  company." 

With  regard  to  the  creation  and  issue  of  preferential  stocks, 
the  same  act40  provided  that  where  any  company  was  author- 
ized by  any  special  act  to  raise  any  additional  sum  by  the  issue 
of  preference  shares  or  stock  with  the  sanction  of  a  general  meet- 
ing it  might  create  and  issue  (according  as  the  authority  given 
by  the  special  act  extends  to  shares  only,  or  to  stock  only,  or  to 
both)  such  shares  or  stock  as  the  company  from  time  to  time  saw 
fit.  It  was,  however,  further  provided  that  such  stock  should 
not  affect  any  guarantee,  or  any  preference  or  priority  in  the 
payment  of  dividend  or  interest,  granted  by  the  company  under, 
or  confirmed  by,  any  previous  act. 

The  act  also  required  that  the  terms  and  conditions  to  which 
any  preference  share  or  stock  was  subjected,  should  be  clearly 
stated  in  the  certificate  of  the  preference  share  or  portions  of  the 
preference  stock.41 

ss  ibid.,  s.  16. 

39  26  &  27  V.  c.  118,  s.  14. 

40  26  &  27  V.  cap.  118,  s.  13. 

*i  Companies  Clauses  Act,  1863,  26  &  27  V.  c.  118,  a.  15. 


40  RAILWAY   FINANCE  IN   ENGLAND  [40 

After  the  adoption  of  those  provisions  regarding  preference 
shares,  there  was  for  a  number  of  years  a  constant  tendency  for 
the  proportion  of  preferential  capital  to  grow  more  rapidly  than 
that  of  the  ordinary  capital.  Thus  in  1858  the  ordinary  and 
preference  capital  were  outstanding  in  the  proportion  of  56  to 
44,  while  in  1870  and  1871  the  relative  proportions  were  re- 
versed, becoming  43  to  57  and  42  to  58  respectively.42  Such 
changes  might  have  been  brought  about  by  two  entirely  different 
causes.  In  the  first  place,  when  railway  enterprise  became  es- 
tablished,  it  might  be  reasonably  expected  that  the  preference 
capital  would  tend  to  increase  more  rapidly  than  the  ordinary. 
When  a  railway  pays  large  dividends  on  its  ordinary  shares,  it 
can  raise  money  on  easy  terms  by  issuing  preference  or  deben- 
ture stocks  at  fixed  rates  of  interest.  This  seems  to  have  been 
largely  the  case  in  England.  On  the  other  hand,  when  a  com- 
pany pays  little  or  no  dividend  on  its  ordinary  shares,  it  will  be 
compelled  to  resort  to  the  issue  of  such  preferential  shares  for 
raising  money,  in  order  to  avoid  heavier  sacrifices. 

Another  class  of  shares  or  rather  another  nomenclature  given 
to  the  ordinary  shares,  known  as  preferred  and  deferred  shares, 
has  come  into  vogue  since  1868.  These,  in  reality,  do  not  con- 
stitute any  separate  class  of  shares,  but  simply  represent  two 
divisions  into  which  the  ordinary  shares  are  divided.  All  the 
rules  governing  the  ordinary  shares  are  also  applicable  to  these 
preferred  and  deferred  stocks,  except  that  special  rules  have 
been  adopted  to  govern  the  process  of,  and  the  conditions  under 
which,  the  division  may  be  executed. 

The  first  known  instance  of  "stock  splitting,"  by  which  the 
ordinary  shares  are  divided  into  preferred  and  deferred,  took 
place  in  1854  in  the  case  of  the  Great  Northern.43  During  that 
year  £12  having  been  paid  on  each  £20  share  of  that  Company,  a 
panic  seized  upon  the  public  mind  and  grave  doubts  were  enter- 
tained as  to  whether  the  boldly  competitive  scheme  of  that  com- 
pany could  be  successful  in  the  face  of  adverse  circumstances. 
At  the  same  time  the  London  and  North- Western  authorities 
were  not  slow  to  take  advantage  of  the  situation  in  making 
things  uneasy  for  their  competitors.  In  order  to  push  the  thing 

«  Capt.  Tyler's  annual  report  to  the  Board  of  Trade,  1873,  p.  4. 
«  Railway  Times,  May  2,  1868. 


41]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  41 

along,  the  directors  of  the  Great  Northern  adopted  the  proposi- 
tion, —  not  to  forfeit  the  shares  and  confiscate  the  whole  of  the 
payments  thereon,  —  but  to  lay  aside  £10  for  the  defaulting  sub- 
scribers, and  to  give  the  remaining  £2  as  a  bonus  to  future  sub- 
scribers with  the  whole  of  a  dividend  up  to  3%,  calling  the 
holdings  of  the  old  subscribers,  B.,  or  deferred,  and  those  of  the 
new  subscribers,  A.,  or  preferred  stocks.  This  procedure  speed- 
ily restored  confidence  in  the  undertaking  and  carried  it  through 
its  vicissitudes. 

This  affair  received  considerable  attention ;  but  it  was  not  until 
1868  that  stock  splitting  became  a  burning  question.  In  that 
year,  the  South  Coast  and  other  companies  applied  for  power 
to  divide  their  ordinary  stocks  into  preferred  and  deferred  or- 
dinary", at  the  option  of  the  shareholders.44  Consequently  strict 
regulations  were  adopted  in  the  Regulation  of  Railways  Act  of 
that  year 45  specifying  with  great  elaboration  the  precise  condi- 
tions under  which  the  division  of  stocks  might  be  effected. 

There  was  no  debate  on  this  clause ;  but  there  was  one  in  the 
House  of  Lords  on  a  similar  clause  of  the  South  Coast  Railway 
Bill  of  that  year  just  referred  to,  from  which  the  clause  in  the 
Regulation  of  Railways  Act  was  copied.  When  the  South  Coast 
Railway  Bill  was  in  the  House  of  Lords,  the  clause  giving  power 
for  splitting  stocks  was  struck  out.  But  when  the  bill  was  con- 
sidered in  the  House  of  Commons,  the  original  clause  was  re- 
inserted in  the  bill.  Finally  when  the  bill  came  back  to  the  up- 
per house  of  Parliament  again,  a  motion  was  again  made  to  omit 
that  clause.  Lord  Redesdale  very  strongly  opposed  the  division 
of  stocks,  on  the  ground  that  such  a  practice  would  favor  stock 
jobbing.46 

On  the  other  hand,  the  Duke  of  Richmond,  who  was  then  pres- 
ident of  the  Board  of  Trade,  supported  the  clause  on  general 
principles.  He  maintained  that  "the  tendency  of  Parliament 
had  been  not  to  interfere  with  the  financial  arrangements  of  these 
companies;  providing,  of  course,  that  Parliament  saw  that  no 
injustice  was  done  to  mortgages,  or  other  parties.  .  ."  He 

**  Evidence  before  Select  Committee  on  Railway  Stock  Conversion,  1890, 
p.  37. 

45  31  &  32  V.  c.  119. 

46  Hansard,  193 :  1545. 


42  RAILWAY   FINANCE  IN   ENGLAND  [42 

further  claimed  that  to  prohibit  the  splitting  of  stocks  was  en- 
tirely opposed  to  the  recommendations  of  the  Railway  Commis- 
sion,47 which  went  very  fully  into  the  question,  and  gave  it  as 
their  opinion  that  it  was  the  more  judicious  course  for  Parlia- 
ment to  relieve  itself  from  interference  in  the  financial  affairs 
of  railway  companies.  Instead  of  proving  injurious,  he  believed 
the  proposed  subdivision  of  stocks  would  tend  to  give  all  parties 
concerned  an  additional  interest  in  seeing  that  the  directors  did 
their  duty.48 

After  considerable  discussion,  the  clause  was  adopted  with 
thirty  contents  and  seven  non-contents.49  Since  then  the  regula.- 
tions  governing  the  splitting  of  shares  have  been  elaborated  but 
not  modified,  and  railway  companies  have  been  given  the  liberty 
to  divide  their  shares  under  these  or  similar  regulations.50 

Commenting  upon  this  clause,  the  Railway  Times 51  said  that 
it  was  certainly  to  be  regretted  that  "the  Legislature  should 
have  lent  itself  to  a  system  capable  of  further  propagation  of  so 
vile  a  mischief,"  and  it  concluded  that  "we  have  only  to  hope 
that  the  nuisance  may  become  so  prevalent  as  to  ensure  its  own 
corrective." 

But  the  hope  of  the  Railway  Times  was  not  realized.  On  the 
contrary,  not  only  has  the  practice  of  "splitting"  spread,  but  it 
has  also  developed  into  the  widespread  "stock- watering"  which 
was  not  even  thought  of  at  the  time  when  Parliament  first  gave 
its  permission  to  stock  splitting.  A  comparison  of  the  following 
clauses  of  a  railway  bill  passed  in  1890  52  with  the  part  of  the 
Regulation  of  Railways  act,  1868,  quoted  above,  may  serve  to 
show  the  vast  difference  between  the  ;  regulations  governing 
"splitting"  as  adopted  in  1868  and  the  degenerated  practice 
which  took  place  afterwards.  The  second  clause  of  the  Bill  of 
London  and  South- Western  Railway  passed  in  1890  provides: 

The  company  would  create  ordinary  stock  of  two  classes, — (1)  preferred 
4%  ordinary  stock,  and  (2)  deferred  duplicate  ordinary  stock,  both  classes 

47  He  probably  referred  to  the  Eoyal  Commission  on  Railways,  1867. 

48  Hansard,  193 :  1545. 

49  Hansard,  193:  1549. 

so  In  the  Model  Bills  and  Glauses  of  the  House  of  Lords,  1909,  eight 
clauses  (pp.  24-25)  were  devoted  to  the  regulations  governing  the  division 
of  stocks. 

si  Railway  Times,  August  8,  1868,  p.  819. 

52  Railway  Times,  May  17,  1890. 


43]  LEGISLATIVE   SUPERVISION    OF    CAPITALIZATION  43 

of  which  to  be  in  substitution  of  a  corresponding  amount  of  paid-up  ordi- 
nary stock;  that  is  to  say,  £100  of  the  preferred  and  £100  of  the  deferred 
ordinary  stock  should  be  substituted  for  every  £100  of  the  existing  ordinary 
stock. 

But,  it  may  be  remembered,  what  was  permitted  in  1868  was 
a  mere  "splitting,"  —  "preferred  and  deferred  ordinary  stock 
shall  be  issued  only  in  substitution  of  equal  amounts  of  paid-up 
ordinary  stock, ' '  while  the  later  practice  was  actually  ' '  duplica- 
tion," wherewith  stock  certificates  bearing  a  face  value  of  £200 
were  given  for  every  £100  paid  in. 

The  chief  reason  which  led  the  companies  to  indulge  in  stock 
splitting  was  that  they  thought  the  divided  stocks  would  com- 
mand higher  prices  than  the  solid  property.  But  the  Railway 
Times  both  in  1868  and  1891,  the  years  in  which  stock  splitting 
began  and  reached  its  highest  point  of  development,  respectively, 
have  proven  by  the  market  quotations  of  the  two  kinds  of  stocks 
of  several  companies  that  the  expectation  of  the  companies  was 
by  no  means  well  founded  in  many  cases.53  On  the  other  hand, 
the  same  paper 5*  showed  that  much  confusion  resulted  from  the 
splitting  of  stocks.  Investors  were  in  many  instances  led  to 
take  up  one  section  of  these  divided  stocks  under  the  delusion 
that  the  deferred  portion  (as  in  the  case  of  the  Great  Northern, 
the  originator  of  the  scheme,  just  referred  to)  had  been  previous- 
ly paid  up.  As  this  was  far  from  being  the  true  state  of  affairs 
in  many  instances,  much  disappointment  and  suspicion  arose. 
Therefore,  Parliament  was  blamed  for  being  too  ready  to  comply 
with  "every  request  made  to  it  by  speculators  in  the  most  des- 
perate condition. ' ' 55 

In  England  it  has  been  held  from  the  beginning  of  railway 
legislation  56  that  it  is  not  the  legitimate  business  of  a  railway 
company  to  apply  to  one  purpose  the  funds  which  have  been 
raised  for  another  and  that  it  was  the  duty  of  railway  com- 
panies to  keep  up  the  value  of  their  capital  assets  —  no  divi- 
dends may  be  paid  out  of  capital.57  In  the  early  railway  acts 

s3  See  Railway  Times  for  November  14,  and  November  28,  1868,  and 
May  23,  1891,  p.  606. 

si  Rail-way  Times,  May  2,  1868. 

ss  Ibid. 

ss  See  Report  of  Committee  on  Railway  Companies  Powers,  1864,  p.  58. 

57  Section  CLXX  of  the  Croydon  act  of  1837  provided  "That  all  the 
money  to  be  raised  by  the  said  company  by  virtue  of  this  Act  shall  be  laid 


44  RAILWAY   FINANCE  IN   ENGLAND  [44 

of  incorporation  provisions  were  made  as  to  the  purpose  for 
which  the  company  was  incorporated  and  the  proper  mode  of 
applying  the  capital  raised.  Thus  in  the  first  Companies  Clauses 
Act 5S  a  specific  provision  was  made  to  the  effect  that  all  the 
money  raised  by  the  company  should  be  applied,  first,  in  paying 
the  costs  and  expenses  incident  thereto,  and,  second,  in  carrying 
the  purposes  of  the  company  into  execution.  It  was  further 
provided  by  that  act  that,  unless  expressly  provided  to  the  con- 
trary, companies  might  receive  and  apply  to  the  purpose  of  the 
company  any  calls  to  be  made,  notwithstanding  mortgages.59 

Thus  both  the  private  and  the  public  general  acts  required 
that  the  company  should  first  of  all  apply  its  capital  to  the 
payment  of  expenses  already  incurred  for  forming  the  company, 
and  then  to  the  execution  of  the  purpose  for  which  the  company 
was  incorporated. 

The  financial  difficulties  and  pressure  for  capital  caused  by 
the  extravagant  extension  of  railways  during  the  forties  led  to 
considerable  violation  of  the  foregoing  provisions.  Therefore 
the  Lords'  committee  of  1849  was  instructed  to  devise  means  to 
guard  against  the  application  of  funds  to  any  other  purpose  than 
those  authorized  by  Parliament.  This  committee  recommended 
that  railway  companies  should  be  required  to  explain  in  their 
capital  accounts  not  only  how  money  was  raised  but  the  under- 
takings to  which  it  was  applicable  and  the  manner  in  which  it 
was  actually  spent.60 

During  the  latter  part  of  the  fifties  and  the  first  part  of  the 
sixties,  in  many  railway  bills  for  constructing  new  works,  pro- 
visions were  not  made  for  raising  additional  capital;  but  the 
companies  were  permitted  to  apply  to  the  new  works  any  money 

out  and  applied,  in  the  first  place,  in  paying  and  discharging  all  costs  and 
expenses  of  applying  for,  obtaining,  amd  passing  this  Act,  or  preparatory 
or  relating  thereto,  incurred;  .  .  .  and  the  remainder  of  such  money 
shall  be  applied  in  and  towards  purchasing  lands,  and  making  and  main- 
taining the  said  railway  and  other  works,  and  in  otherwise  carrying  this 
Act  into  execution ;  and  that  the  expenses  incurred  by  the  several  provisional 
committees  or  boards  of  directors  for  the  said  .  .  .  lines  .  .  .  shall 
be  raised  and  paid  by  the  subscribers  to  the  said  several  lines  ...  in 
proportion  to  the  amount  of  their  respective  subscriptions.  .  ." 

68  8  V.  c.  16,  s.  65. 

698  V.  e.  16,  s.  43. 

60  Report  of  Eoyal  Commission  on  Railways,  1867,  p.  xviiL 


45]  LEGISLATIVE    SUPERVISION    OP    CAPITALIZATION  45 

which  they  might  have  been  authorized  to  raise  by  previous  acts 
and  which  might  not  be  required  for  the  purposes  for  which  the 
money  was  originally  raised.  In  order  to  protect  the  sharehold- 
ers from  the  danger  that  might  arise  from  the  application  of  the 
funds  of  railway  companies  to  purposes  not  sanctioned  by  Par- 
liament and  not  in  contemplation  at  the  time  when  their  powers 
were  obtained,  both  Parliament  and  the  Board  of  Trade  thought 
that  it  was  very  important  to  take  advantage  of  every  suitable 
opportunity  to  ascertain  and  limit  the  amount  of  money  that 
might  be  raised  and  to  define  clearly  its  application.61  Moreover, 
the  Board  of  Trade  emphasized  this  point  for  several  years  suc- 
cessively beginning  1859.62 

When  the  Companies  Clauses  Act  of  1863  was  passed,  a  clause 
was  devoted  to  specifying  the  application  of  money  raised  by  the 
issue  of  debenture  stocks,  thus  giving  effect  to  the  recommenda- 
tion of  the  Board  of  Trade.63  It  enacted  that  money  raised  by 
debenture  stock  should  be  applied  exclusively  either  in  paying 
off  money  due  by  the  company  on  mortgage  or  bond,  or  else  for 
the  purposes  to  which  the  same  money  would  be  applicable  if  it 
were  raised  on  mortgage  or  bond. 

In  the  Railway  Construction  Facilities  Act  of  the  following 
year,64  provision  was  again  made  to  the  effect  that  railway  com- 
panies ' '  shall  apply  every  part  of  the  money  raised  only  for  pur- 
poses for  which  it  is  by  the  certificate  (of  the  Board  of  Trade) 
authorized  to  be  applied." 

In  practice,  however,  there  seemed  to  be  considerable  violation 
of  these  rules,  especially  by  the  smaller  lines.  A  striking  exam- 
ple may  be  found  in  the  case  of  the  Brecon  and  Merthyr  Railway 
Company.  After  having  repeatedly  violated  the  law  in  raising 
its  capital,65  this  company  authorized  the  issue  of  £20,000  for  the 

ei  Board  of  Trade  annual  report  on  Eailway  Bills,  1860,  p.  22. 

62  Ibid.,  1863,  p.  19. 

es  26  &  27  V.  c.  118,  sec.  32. 

e*  27  &  28  V.  c.  21,  sub-sees.  (4)   and  (5)  of  see.  29. 

65  This  railway  about  66  miles  long  waa  originally  contracted  to  be  con- 
structed by  a  certain  Savin  at  £10,000  per  mile;  but  act  after  act  had  since 
been  obtained  by  its  directors  and  the  contractor  for  increasing  the  capital, 
until,  instead  of  the  original  authorized  capital  of  £700,000,  the  shares  and 
debentures  issued  to  the  contractor  for  its  construction  amounted  to 
£2,000,000.  In  this  amount  there  were  no  less  than  ten  kinds  of  preference 
shares,  each  ranking  in  order  of  date,  and  fourteen  issues  of  debentures 


46  RAILWAY   FINANCE  IN   ENGLAND  [46 

construction  of,  and  with  a  special  hypothecation  on,  a  branch 
called  the  Ivor  &  Dowlais,  which  latter  was  authorized  in  1865 
but  not  yet  commenced  in  1867.  It  was  also  found  that  the  act 
of  1865  had  already  authorized  the  creation  for  the  construction 
of  this  line,  of  shares  and  debentures  to  the  amount  of  £20,000 
and  had  specially  provided  that  the  money  should  only  be  applied 
of  this  line  of  shares  and  debentures  to  the  amount  of  £20,000  and 
had  actually  been  issued  under  the  name  and  were  then  existing; 
but  that  the  money  was  not  applied  to  the  line,  which  was  left 
entirely  untouched. 

Moreover,  this  kind  of  irregularities  seemed  to  have  continued 
for  some  time.  Thus  in  1869  a  complaint,  which  had  many 
parallels  in  railway  affairs,  was  made  against  the  Caledonian 
Railway  by  the  Forth  and  Clyde  Navigation  Company,  with 
whose  undertaking  and  many  others  the  Caledonian  had  amal- 
gamated. The  charge  was  that  the  absorbing  company  had  ap- 
plied the  money  raised  under  the  special  borrowing  powers  of 
the  particular  undertaking  to  general  purposes,  to  the  amount 
of  more  than  £100,000,  in  breach  of  an  engagement  with  the 
absorbed  company.  In  this  connection,  the  Economist  said66 
that  in  many  cases  even  where  there  was  not  any  apparent  ob- 
jection, the  public  had  been  "not  a  little  injured"  through  the 
diversion  of  the  borrowing  powers  conferred.  It  further  said 
that  "if  the  Legislature  lays  down  rules  ...  in  order  to 
secure  the  proper  execution  of  undertakings  which  it  authorized 
and  which  it  has  a  claim  to  see  executed  by  virtue  of  the  priv- 
ileges conferred  .  .  .  care  should  be  taken  to  have  the  rules 
put  in  force,  and  a  breach  of  them  .  .  .  ought  to  be  ren- 
dered impossible." 

Another  form  in  which  capital  has  been  applied  to  purposes 
other  than  those  authorized  by  Parliament  is  the  payment  of 
dividend  out  of  capital.  This  practice  has  been  prohibited  since 
the  early  thirties.  Thus  in  the  Croydon  Act  of  1837  the  pro- 

also  ranking  in  order  of  creation.  Then  the  company  again  obtained  from 
the  Board  of  Trade,  under  the  general  Railway  Act,  1864,  and  without  any 
sanction  for  new  lines,  powers  to  create  £570,000  of  fresh  preference  stock 
and  £190,000  of  fresh  debentures  stock  for  which  they  could  not  find  any 
market.  See  London  Times,  November  13,  1867,  p.  4. 
ee  Economist,  November  6,  1869. 


47]  LEGISLATIVE    SUPERVISION    OP    CAPITALIZATION  47 

vision  was  made 67  to  the  effect  that  no  dividend  should  be  made 
exceeding  the  net  amount  of  clear  profit  at  the  time  being  in 
the  hands  of  the  company,  nor  whereby  the  capital  of  the  said 
company  should  in  any  degree  be  reduced. 

During  the  forties  there  seemed  to  be  a  need  for  a  relaxation 
of  these  restrictions.  During  that  period  many  railway  com- 
panies received  their  capital  by  instalments  and  had  to  pay  in- 
terest pending  construction.68  When  calls  were  made  at  a  time 
when  a  high  rate  of  interest  could  be  obtained  the  subscribers 
were  unwilling  to  meet  such  calls.  ''To  obviate  this  difficulty" 
it  was  suggested  that  ' '  it  was  not  unreasonable  for  railway  com- 
panies to  resort  to  the  unbusiness-like  practice  of  allowing  in- 
terest 69  on  calls  before  a  railway  is  opened,  and  consequently 
before  it  has  any  revenue.  The  interest  was  therefore  charged 
to  capital,  and  served  to  swell  the  capital  expenditures. " 70  It 
must  be  stated  that  in  some  cases  the  payment  of  such  "interest" 
out  of  capital  during  construction  appeared  necessary,  for  in 
such  cases  it  was  ' '  utterly  ridiculous  to  hope  for  the  payment  of 
deposits  unless  interest  be  allowed  upon  them  during  the  con- 
struction of  the  line.  Men  cannot  afford  to  lock  up  their  capital 
in  a  total  sacrifice  of  present  results  for  the  chance  of  any  future 
proceeds,  however  abundant. "  71  In  still  other  cases,  the  prac- 
tice was  known  as  being  advantageous  to  all  concerned. 

On  the  whole,  however,  it  seemed  that  the  payment  of  divi- 
dends out  of  capital  was  not  desirable.  It  was  well  known  as 
Lord  Somerset  pointed  out 72  that  many  companies  had  gone  on 
paying  dividends  out  of  their  capital  stock,  as  if  they  were  in  a 
most  flourishing  condition.  These  companies  sometimes  went  on 
paying  dividends  out  of  their  capital  until  their  capital  no  longer 
existed. 

Under  such  circumstances,  Parliament  saw  fit  to  insert  a  clause 
in  the  Companies/  Clauses  Act,  1845,73  stipulating  that ' '  the  com- 
er i  v.  c.  cxix,  s.  CXCIII. 
es  Hansard,  78:  48. 

69  Interest  here  is  used  really  in  the  sense  of  dividend. 

70  Bail-way  Times,  April  27,  1844. 

71  Ibid.,  July  25,  1846. 
"Hansard,  78:  48-49. 
"  8  V.  c.  16,  s.  121. 


48  RAILWAY   FINANCE  IN   ENGLAND  [48 

pany  shall  not  make  any  dividend  whereby  their  capital  stock 
will  be  in  any  degree  reduced." 

The  .general  interpretation  given  to  this  clause,  as  shown  by 
the  debate  in  Parliament,  was  that  it  was  not  to  prohibit  the  pay- 
ment of  dividends  from  the  interest  of  capital  or  pending  con- 
struction, but, to  prevent  the  payment  of  dividends  out  of  the 
capital  stock  after  the  works  were  completed  and  when  no  profits 
had  been  obtained.74 

In  1847  after  the  panic  which  followed  the  great  railway  ex- 
tension of  1845,  a  standing  order  was  passed  by  the  House  of 
Lords  which  remained  in  force  for  many  years,  providing  that 
in  every  railway  bill  a  clause  should  be  inserted  prohibiting  the 
payment  of  interest  out  of  capital.75 

The  Companies  Act,  1862,76  also  provided  in  the  first  schedule 
that.no  dividend  should  be  paid  except  out  of  profits  earned. 
But  this  latter  regulation  was  not  compulsory  on  the  companies 
registered  under  that  act,  for  they  were  empowered  by  section 
14  to  make  rules  of  association  excluding  the  regulations  in  the 
first  schedule,  and  were  thus  practically  enabled  to  make  what 
regulations  seemed  best  to  the  shareholders.  Consequently  a 
curious  anomaly  arose  out  of  the  conflict  between  the  standing 
order  and  the  Companies  Act,  1862.77 

In  the  Railway  Construction  Facilities  Act,  1864,78  provisions 
were  again  made  prohibiting  the  application  of  capital  for  the 
purpose  of  paying  interest  or  dividend  on  account  of  calls  made. 
In  1867  a  clause  was  inserted  in  the  Railway  Companies  Act  of 
that  year79  which  prescribed  in  detail  the  conditions  under 
which  a  railway  might  declare  any  dividend.  It  said  that  no 
dividend  should  be  declared  by  a  company  until  the  auditors  had 
certified  that  the  current  half  yearly  accounts  contained  a  full 
and  true  statement  of  the  financial  condition  of  the  company, 
and  that  all  proper  expenses  had  been  deducted  from  revenue. 

But  the  act  further  provided  that  "if  the  directors  differ  from 
the  judgment  of  the  auditors  with  respect  to  the  payment  of  any 

74  Hansard,  78:  48. 

75  Railway  Times,  March  16,  1889. 

76  25  &  26  V.  c.  89. 

77  Report  of  select  committee,  1882,  p.  iii. 

78  27  &  28  V.  e.  121,  sub-see.  (3)  of  s.  29. 

79  30  &  31,  V.  c.  129,  s.  30. 


49]  LEGISLATIVE    SUPERVISION    OF    CAPITALIZATION  49 

such  expenses  out  of  the  revenue  of  the  half  year,  such  difference 
shall,  if  the  directors  desire  it,  be  stated  in  the  report  to  the 
shareholders,  and  the  company  in  general  meeting  may  decide 
thereon,  subject  to  all  the  provisions  of  the  law  then  existing, 
and  such  decision  shall,  for  the  purpose  of  the  dividend,  be  final 
and  binding."  Taking  advantage  of  this  last  proviso,  many 
railway  companies,  like  the  Brighton,80  charged  large  sums  to 
their  capital  account,  in  opposition  to  the  opinion  of  the  ac- 
countants and  auditors  that  the  same  should  have  been  charged 
to  revenue.  After  violating  the  law  in  this  manner,  they  would 
then  legalize  their  illegal  act  by  calling  a  general  meeting  of  the 
company  and  abide  by  the  decision  of  the  meeting  which  accord- 
ing to  the  law  should  be  ' '  final  and  binding. ' ' 81 

One  of  the  chief  reasons  which  led  to  the  evasion  of  the  law 
was  that,  as  a  member  of  Parliament  remarked  in  1867,  "There 
is  nowhere  to  be  found  a  clear  definition  of  working  expenses, 
that  is  to  say  there  is  nothing  to  define  the  charges  which  ought 
to  go  to  make  up  the  working  expenses  of  a  company,  before  you 
arrive  at  the  profit  upon  which  the  debenture  interest  forms  the 
first  charge. ' ' 82  The  government  itself  was  said  to  be  unable  to 
distinguish  working  expenses  from  capital  charges.  When  once 
it  was  asked  to  define  and  determine  what  constituted  the  profits 
of  a  railway,  the  Board  of  Trade  appointed  a  committee  to  con- 
sider the  matter.  This  departmental  committee  reported,  how- 
ever, that  ' '  it  was  too  complex  and  difficult  a  matter  for  them  to 
undertake,  and  they  recommended  that  the  question  be  referred 
to  a  small  body  of  experts  specially  appointed  for  the  purpose. 
The  Board  of  Trade  was  consequently  asked  to  appoint  such  a 
committee,  but  it  declined  to  do  it.83 

Under  such  circumstances,  it  became  an  easy  matter  for  rail- 
ways to  disregard  all  principles  of  accounting,  if  they  saw  fit. 
The  gross  income  representing  the  returns  from  which  the  work- 
ing expenses  must  be  deducted  before  any  money  should  be 
used  for  dividends,  was  a  definite  quantity  and  could  not  be 
meddled  with ;  but  the  working  expenses  were  not,  and  might  be 
"switched."  So  some  of  the  railway  directors,  in  order  to  make 

so  London  Times,  November  18,  1867,  p.  8. 
si  See  Fraser,  British  Eailways,  1903,  p.  117. 
82  Hansard,  186:  1030. 
ss  Fraser,  British  Eailways,  1903,  pp.  52-53. 


50  RAILWAY   FINANCE  IN   ENGLAND  [50 

their  business  appear  "rosy,"  often  charged  part  of  such  work- 
ing expenses  to  capital  and  declared  dividends  out  of  capital.84 

Moreover,  the  matter  of  charging  certain  items  of  current  ex- 
penses, such  as  the  purchase  of  engines,  etc.,  to  capital  was 
viewed  with  more  or  less  approval  hy  the  shareholders.  In  some 
cases  it  was  not  considered  at  all  improper  or  injurious,  still  less 
dishonest,  to  defray  a  portion  of  the  current  expenditure  out  of 
money  borrowed,  and  treat  as  net  income  or  profit  what  then  ap- 
peared as  the  remainder.  These  shareholders  even  would  often 
exact  dividends  whether  earned  or  not,  and  would  connive  at 
the  means  so  long  as  the  immediate  end  was  secured.  A  decent 
dividend  not  only  enriched  their  pockets,  but  kept  up  the  market 
value  of  their  shares.  Five  per  cent  in  hand,  with  their  holdings 
at  par,  even  temporarily,  appeared  far  more  comfortable  than 
three  per  cent  with  the  stock  at  a  discount,  in  spite  of  promising 
hopes.  Therefore,  accounts  were  "cooked"  on  the  one  hand  and 
"swallowed"  on  the  other.85 

In  1882  an  open  effort  was  made  to  remove  the  restrictions 
prohibiting  the  payment  of  dividend  out  of  capital.86  A  com- 
mittee was  appointed  by  Parliament  to  consider  the  matter. 
This  committee,  after  six  sessions  and  a  month's  work,  report- 
ed **  tnat  the  prohibition  of  the  payment  of  interest  out  of  cap- 
ital was  in  accordance  with  "sound  financial  principles  and  acts 
as  a  protection  to  the  public."  In  special  cases,  however,  the 
committee  recommended  that  it  might  be  permissible,  subject  to 
strict  rules,88  to  pay  interest  upon  capital  during  construction. 

s*  London  Times,  October  29,  1867,  p.  6. 
as  London  Times,  November  18,  1867,  p.  8. 
se  Eailway  Times,  March  16,  1889,  p.  374. 

87  See  Report  of  Select  Committee,  1882,  Parliamentary  Paper,  1882, 
vol.  13,  p.  iii. 

ss  The  rules  recommended  were  briefly : 

(1)  Clauses  denning  the  amount  of  interest,  and  the  terms  for  which  it 
is  payable,  to  be  inserted  in  every  bill,  and  to  be  specially  reported  on  by 
the  Board  of  Trade  before  being  submitted  to  the  committee  (on  Railway 
Bills). 

(2)  Such  interest  to  be  an   addition  to  the  authorized  capital  of  the 
undertaking. 

(3)  Power  of  issuing  debentures  to  be  reckoned  on  the  capital  exclusive 
of  such  addition  for  interest. 

(4)  Payment  of  such  interest  to  continue  only  during  construction  of 


51]  LEGISLATIVE   SUPERVISION    OP    CAPITALIZATION  51 

Although  the  effort  of  the  railway  companies  was  unsuccessful, 
it  brought  about  much  agitation,  as  a  result  of  which  the  House 
of  Lords  in  1886  modified  its  standing  order  so  as  to  give  power 
to  railway  companies,  under  certain  strict  provisions,  to  pay  in- 
terest out  of  capital.89 

The  relaxation  of  the  earlier  regulations,  however,  was  not  ac- 
companied with  such  good  results  as  was  expected.90  On  the 
contrary,  much  evil  was  done.  The  effect  of  paying  interest  out 
of  capital,  as  observed  a  writer,91  has  been  to  give  a  certain 
particular  stock  an  altogether  fictitious  value,  and  genuine  in- 
vestors have  been  victimized.  The  same  writer  also  alleged,  not 
without  reason,  that  the  dividing  up  of  principal  money  as 
profits  and  the  lack  of  restraint  as  to  their  enormous  expansion 
of  capital  expenditure,  regardless  of  its  productivity  of  revenue, 
can,  and  did,  only  eventuate  in  a  diminution,  or  even  entire  ces- 
sation, of  dividends  on  ordinary  stocks.92 

The  result  of  charging  working  expenses  to  capital  has  proved 
to  be  equally  objectionable.  It  necessitated  the  overburdening 
of  the  business  with  large  capital  charges,  which  sooner  or  later 
would  give  much  embarrassment  to  the  property.93  In  so  far  as 
the  public  was  not  clearly  aware  of  these  manipulations,  the 
practice  proved  exceedingly  illusory.  It  was  merely  a  matter  of 
white-washing  the  true  state  of  affairs  by  throwing  expenses  on 
the  revenue  of  the  future.  Indeed,  the  besetting  evil  of  railway 
finance,  as  observed  the  London  Times,9*  "has  arisen  from  the 

the  works,  or  for  such  less  period  as  the  committee  may  think  fit  to  author- 
ize, according  to  the  circumstances  of  the  case. 

(5)  The  rate  of  interest  to  be  fixed  by  the  committee,  but  in  no  case  to 
exceed  5  per  cent. 

(6)  The  prospectus  and  share  certificates  to  contain  on  the  face  of  them 
an  intimation  that  interest  is  payable  out  of  capital  during  construction 
only. 

The  committee  also  recommended  that  these  provisiona  should  be  enacted 
in  a  general  act,  instead  of  mere  modifications  of  the  standing  orders.  See 
Report  of  Select  Committee,  May  19,  1882,  Parliamentary  Paper,  1882, 
vol.  13. 

**  Railway  Times,  March  16,  1889,  p.  373. 

so  Ibid. 

91  Fraser,  British  Railways,  1903,  pp.  108-109. 

92  Ibid.,  p.  144. 

93  London  Times,  November  18,  1867,  p.  8. 

94  Ibid.,  October  29,  1867,  p.  6. 


52  RAILWAY   FINANCE  IN   ENGLAND  [52 

confusion  of  two  things  —  capital  and  revenue.''  Some  of  the 
most  serious  disputes,  which  affected  in  a  remarkable  degree  the 
property  of  some  important  companies,  turned  entirely  upon  the 
mystification  over  the  charging  of  these  two  items.  Directors 
were  charged  with  carrying  to  capital,  expenses  which  belonged 
to  revenue;  and  proprietors  demanded  that  capital  accounts 
should  be  closed.  The  general  effect  was  that  fictitious  dividends 
made  it  almost  impossible  to  estimate  the  value  of  any  railway 
property. 

From  the  foregoing  pages,  it  is  clear  that  most  of  the  regula- 
tions governing  the  share  capital  of  railway  companies  were 
adopted  prior  to  1845.  It  is  only  in  a  very  few  instances  where 
any  changes  have  been  made  after  the  passage  of  the  Companies 
Clauses  Consolidation  Act  of  1845.  But  these  changes,  although 
few  in  number,  have  proven  of  great  importance  as  well  as  of  a 
unique  nature.  Indeed,  it  is  largely  in  the  adoption  of  her  regu- 
lations since  1845  concerning  such  matters  as  the  creation  of  pre- 
ferred and  deferred  stocks  and  the  application  of  capital  that 
England  especially  differed  from  other  countries. 

A  special  feature  revealed  is  the  fact  that  practically  all  the 
measures  concerning  the  share  capital  of  railway  companies,  as 
we  have  seen,  were  adopted  as  a  matter  of  course.  With  the  ex- 
ception of  those  concerning  stock  splitting  and  the  application  of 
capital  practically  all  the  rules  governing  railway  share  capital 
were  adopted  without  any  debate  in  Parliament.  Nor  did  they 
receive  much  discussion  from  the  public.  This,  however,  is  not 
the  case  concerning  the  regulation  of  the  other  branches  of  rail- 
way finance  as  we  shall  see  in  the  following  chapters. 


CHAPTER  III 

SUPERVISION  OF  RAILWAY  CAPITALIZATION 
B  — LOAN  CAPITAL 

In  the  earlier  years  of  the  English  railways,  loan  capital  con- 
sisted of  mortgages  or  bonds,  which  were  commonly  called  de- 
bentures, and  which  resembled  the  bonds  issued  in  the  United 
States.  In  later  years  a  class  of  securities  called  debenture- 
stock  came  into  vogue.  The  debenture-stocks  were  similar  to  the 
debentures  in  that  each  of  them  represented  a  debt  with  a  fixed 
rate  of  interest  against  the  company.  They  were,  however,  dis- 
tinctly different  in  two  respects.  First,  the  debentures  were 
usually  issued  for  limited  periods,  while  the  debenture-stocks 
were  usually  perpetual;  and  second,  the  former  were  repre- 
sented by  deeds  issued  by  the  company  to  cover  large  lump  sums 
of  money,  whereas  the  latter  were  issued  in  the  form  of  circulat- 
ing certificates,  in  coupon  form,  to  represent  smaller  amounts. 
Debenture  stocks,  however,  were  little  known  until  the  fifties. 
Accordingly,  Parliamentary  regulations  applied  at  first  to  the 
temporary  debentures  or  mortgages,  but  were  gradually  modi- 
fied to  take  care  of  the  permanent  debenture-stock. 

The  cardinal  policy  of  Parliament,  as  a  member  of  Parliament 
said,1  to  which  opinion  he  subscribed,  has  been  to  make  the  de- 
benture capital  of  railways  a  secure  investment.  With  this  goal 
in  view,  Parliament  has  endeavored  to  regulate  the  loan  capital 
of  railways  from  the  beginning  of  the  enterprise.  In  each  of  the 
special  acts,  which  created  the  company  or  enabled  it  to  prose- 
cute its  work,  the  amount  of  the  loan  capital  as  well  as  the  man- 
ner in  which  the  company  might  raise  it  were  invariably  set 
forth  in  detail.  Aside  from  some  occasional  and  slight  irregu- 
larities, the  proportion  of  the  loan  capital  was  usually  limited 
to  one-third  of  the  share  capital  of  each  company.2  This  was  done 

i  Hansard,  vol.  183,  p.  785. 
2Cf.  infra,  Chap.  IV. 

53 


54  RAILWAY   FINANCE  IN   ENGLAND  [54 

to  give  security  to  the  debentures  or  mortgages.  Before  a  com- 
pany could  raise  any  additional  capital  by  loans  or  in  any  way 
alter  the  provisions  of  its  incorporation  act  it  was  required  to 
appear  before  Parliament  for  a  special  act  granting  such  power. 
Thus  from  the  beginning  railway  companies  were  subjected  to 
explicit  regulations  set  forth  in  their  special  acts  in  raising 
money  by  loans.  The  following  passage  from  the  London  and 
Croydon  Railway  Act  of  1837  3  may  serve  to  illustrate  how  and 
under  what  conditions  railway  companies  were  permitted  to 
raise  money  by  loans: 

And  be  it  further  enacted,  that  it  shall  be  lawful  for  the  said  company, 
by  an  order  of  any  general  or  special  geiieral  meeting  of  the  said  company, 
after  one-half  of  the  said  capital  shall  have  been  paid  up,  from  time  to 
time  to  borrow  and  take  up  at  interest  any  sum  in  addition  to  their  said 
capital  of  one  million  eight  hundred  thousand  pounds,  not  exceeding  in  the 
whole  the  sum  of  six  hundred  thousand  pounds,  on  the  credit  of  the  said 
undertaking,  as  to  them  shall  seem  proper;  and  the  said  company  and  di- 
rectors .  .  .  after  an  order  shall  have  been  made  for  that  purpose  at 
any  general  or  special  general  meeting  .  .  .  hereby  empowered  to  mort- 
gage, assign,  and  charge  the  property  of  the  said  undertaking,  and  the 
rates,  tolls,  and  other  sums  arising  or  to  arise  by  virtue  of  this  Act,  or  any 
part  thereof,  ...  as  a  security  for  any  such  money  to  be  borrowed  as 
aforesaid,  with  interest;  .  .  .  and  a  copy  of  the  order  of  any  general 
or  special  general  meeting  .  .  .  authorizing  the  borrowing  of  any  such 
sum  of  money,  certified  by  one  director  or  by  the  secretary  or  clerk  of  the 
said  company  to  be  a  true  copy,  shall  be  sufficient  evidence  of  the  making 
of  the  order;  .  .  .  and  all  which  mortgages,  assignments,  and  charges 
shall  be  made  under  the  common  seal  of  the  said  company  by  deed  duly 
stamped,  in  which  the  consideration  for  the  same  shall  be  truly  stated.  .  . 

The  forms  to  be  used  for  such  mortgages  as  well  as  for  the 
transfer  of  the  same  were  prescribed.  Provisions  for  the  regis- 
tration of  the  execution  and  the  transfer  of  such  securities  were 
also  set  forth  in  detail.4 

For  the  security  of  the  creditors,  section  CLXI  of  the  same 
act  provided  that  in  case  of  non-payment  of  interest  as  specified 
in  the  act,  by  an  order  of  two  justices  of  the  peace,  "some  per- 
son may  be  appointed  to  receive  the  whole  or  such  part  of  the 
said  rates,  tolls,  or  sums  as  are  liable  to  pay  such  interest  so  due 
and  unpaid.  .  ." 

The  time  for  repayment  of  the  principal  was  required  to  be 

s  1  V.  c.  CXIX,  sec.  GLX. 
*  Cf.  infra,  Chap.  V. 


55]  SUPERVISION  OP  RAILWAY  CAPITALIZATION  55 

clearly  specified  in  the  mortgage  deed,5  and  if  no  time  was  speci- 
fied, the  holders  of  such  mortgages  might  demand  payment  after 
twelve  months  from  the  date  when  the  loan  was  made,  "upon 
giving  six  calendar  months'  notice  in  writing  to  the  secretary  or 
clerk  of  the 'company.  .  ."6  If  the  company  failed  to  meet 
such  demand  of  repayment  of  the  principal  due  and  if  such 
principal  in  the  aggregate  amounted  to  the  sum  of  £20,000,  two 
justices  might  order  the  appointment  of  receivers  7  as  in  the  case 
of  non-payment  of  interest. 

From  these  provisions,  it  is  clear  that  besides  the  limitations 
upon  the  borrowing  powers  of  railway  companies,  two  distinct 
principles  were  laid  down,  (1)  the  real  security  of  the  mortgages 
was  limited  to  the  ' '  undertaking, ' ' 8  the  tolls  and  rates  of  the 
company,  and  (2)  these  mortgages  were  for  limited  periods,  and 
were  liquidated  or  renewed  upon  the  expiration  of  such  periods. 
Both  of  these  principles,  as  will  be  shown  more  fully,  gave  rise 
to  much  difficulty  afterwards,  the  one  on  account  of  its  own  de- 
fect which  was  not  foreseen  at  the  time  and  the  other  because  of 
the  wrong  conception  of  it  by  the  public. 

These  special  provisions  regarding  loan  capital  soon  became  too 
numerous  and  hence  difficult  for  the  railways  to  follow.  Under 
such  circumstances,  it  was  but  natural  that  many  irregularities 
took  place  in  making  loans,  notwithstanding  the  intention  of 
Parliament  to  prevent  them.  To  simplify  matters,  Parliament 
devoted  no  less  than  twenty  sections  of  its  first  Companies 
Clauses  Act9  to  regulations  governing  loan  capital  of  railways. 
In  this  general  act,  the  miscellaneous  provisions  scattered  in  the 
numerous  special  acts  governing  the  limit  of  borrowings,  the 
registration  of  mortgages  and  transfers,  the  appointment  of  re- 
ceivers, etc.,  were  amplified  and  set  forth  in  a  compact  form. 
The  forms  of  mortgages  and  transfers  contained  in  the  special 
acts  were  also  improved  upon  by  making  the  provisions  more 
specific  and  more  adaptable  to  the  new  conditions.  The  powers 
of  re-borrowing  and  of  conversion  of  loans  into  share  capital 
were  also  amplified.  But  the  most  notable  change  was  that  re- 

5  Sec.  CLXIII. 

e  Sec.  CLXIV. 

7  Sec.  CLXV. 

s  By  undertaking  was  meant  the  business  of  the  Company. 

»  Companies  Clauses  Act,  1845,  8  V.  c.  16. 


56  RAILWAY   FINANCE   IN   ENGLAND  [56 

garding  the  evidence  of  authority  for  borrowing.  Formerly,  as 
seen  in  the  Croydon  Act,  nothing  was  required  to  show  that  the 
company  had  complied  with  the  requirements  set  forth  in  its  pri- 
vate acts  as  to  the  requisite  subscription  and  payment  of  one-half 
of  its  capital,  etc.,  before  borrowing.  The  only  evidence  neces- 
sary was  a  copy  of  an  order  of  a  general  meeting  certified  by  a 
director,  or  the  secretary,  or  even  the  clerk  of  the  company.  By 
the  general  act  of  1845,  however,  a  new  provision  10  was  made  to 
the  effect  that  in  addition  to  such  a  certified  copy  of  an  order  of  a 
general  meeting,  a  certificate  of  a  justice  of  the  peace  showing 
that  the  definite  portion  of  the  company's  capital,  stipulated  in  its 
special  act,  had  been  subscribed  and  paid  up,  should  be  presented 
before  a  company  made  any  loans.  Thus  the  financial  affairs 
were  placed,  to  a  certain  extent,  under  the  supervision  of  a  pub- 
lic officer. 

In  examining  these  clauses  of  the  act  one  cannot  help  being 
impressed  with  the  great  care  which  Parliament  took  in  order  to 
make  the  loan  capital  of  railways  a  safe  investment.  Indeed,  if 
these  provisions  had  been  conscientiously  followed  they  might 
have  proved  effectual  to  carry  out  the  intentions  of  Parliament 
and  to  prevent  much  difficulty  which  occurred  later. 

It  must  be  remembered  that  the  aforesaid  general  act  was 
passed  during  a  period  of  railway  speculation.  This  and  its 
subsequent  collapse,  which  took  place  two  years  later,  furnished 
a  good  test  of  the  usefulness  of  the  provisions  concerning  finance 
just  referred  to.  Up  to  1848  about  £175,000,000  had  been  in- 
vested in  railways,  of  which  about  £40,000,000,  or  one-fourth, 
was  raised  by  loans.  On  account  of  the  collapse  of  1847,  ex- 
orbitant rates  of  interest  had  to  be  offered ;  and  notwithstanding 
such  inducements,  some  of  the  best  lines  could  not  be  completed 
for  want  of  funds.11  During  the  collapse,  railway  credit  was 
greatly  damaged.  Whatever  loans  were  made,  were  only  for 
short  periods.  In  order  to  clear  off  the  wreckage  of  1847,  Par- 
liament in  1850  passed  the  Abandonment  of  Railways  Act 12  ' '  to 
facilitate  the  abandonment  of  railways  and  the  dissolution  of 
railway  companies.  .  ."  This  act  provided  that  the  com- 

10  Companies  Clauses  Act,  1845  (8  V.  e.  16),  sec.  40. 

11  C.  L.  Webb,  Letter  to  H.  Labouchere,  Board  of  Trade,  on  Railways, 
1849,  p.  26. 

12  13  &  14  V.  c.  83. 


57]  SUPERVISION  OP  RAILWAY  CAPITALIZATION  57 

panics'  share  as  well  as  loan  capital  should  be  reduced  propor- 
tionately with  the  amount  of  the  work  abandoned.13  Aside  from 
this  incidental  provision  contained  in  the  Abandonment  Act  of 
1850,  nothing  was  done  to  alter  the  rules  laid  down  in  the  Com- 
panies Clauses  Act  of  1845  during  the  period.  Even  the  de- 
rangements caused  by  the  crisis  of  1847  failed  to  induce  Parlia- 
ment to  adopt  any  new  or  to  modify  its  old  measures.  But  be- 
ginning about  1850  complaints  against  the  existing  system  of 
loans  began  to  be  made  by  numbers  of  investors.  As  the  deben- 
tures issued  under  the  existing  system  were  by  deed  for  large 
lump  sums,  people  with  money  to  invest  were  debarred  from 
placing  it  in  such  debentures  because  they  could  seldom  find 
such  as  would  suit  them  in  amount  and  length  of  time  to  run. 
Some  companies  also  expressed  dissatisfaction  with  the  incon- 
venience and  expense  attending  the  existing  system  of  arranging 
their  debenture  debts.1*  It  was  felt  that  the  securities  for  money 
lent  to  railway  companies  should  be  issued  for  more  convenient 
amounts  and  that  they  should  also  be  made  easier  of  transfer- 
ence. Therefore,  it  was  urged  that  divisible  debenture  stocks  be 
issued  and  the  existing  system  of  stamps  and  registration  re- 
modeled. But  it  was  at  once  recognized  that  it  would  be  diffi- 
cult to  get  rid  of  the  stamps,  since  the  government  would  not 
forego  its  revenue  from  this  source.  To  meet  this  difficulty,  a 
proposal  was  made  that  the  government  should  not  be  stripped 
of  its  tax,  but  only  it  should  receive  it  in  a  different  way.  In 
lieu  of  the  existing  system  of  stamps,  each  company  should  pay  a 
fixed  annual  sum  to  the  government,  calculated  on  an  average 
of,  say  the  preceding  three  or  four  years,  or  in  some  other  way 
satisfactory  to  both  parties.  Then  the  debenture  stock  certifi- 
cates might  be  issued  without  stamps  and  passed  from  hand  to 
hand  without  registration.  In  support  of  this  system,  besides 
other  arguments,  the  success  accompanying  a  corresponding 
change  in  the  East  India  Company's  bonds,  made  under  similar 
conditions,  was  cited.15 

To  do  away  with  registration  would  apparently  save  some 

is  Sec.  28,  13  &  14  V.  c.  83. 

i*  Railway  Times,  Dec.  31,  1853,  p.  1354. 

!5  The  bonds  of  the  East  India  Company  were  once  stamped,  but  in  1835 
the  company  obtained  powers  under  the  Act  5  &  6  Win.  c.  64  to  pay  an 
annual  sum  in  lieu  of  stamp  duty.  Cf.  Railway  Times,  Sept.  25,  1852. 


58  RAILWAY   FINANCE  IN   ENGLAND  [58 

trouble ;  but  it  was  apprehended  that  such  a  course  might  create 
confusion  and  also  impair  the  security  of  the  debenture-holders. 
To  avoid  such  danger,  it  was  proposed:  (1)  Any  company  wish- 
ing to  avail  itself  of  the  power  of  the  act  should  be  required  to 
show  that,  on  the  average  of  the  preceding  three  years,  its  net 
annual  profit  had  been  equal  to  10%  on  its  debt;  (2)  the  amount 
of  the  debt  should  in  no  case  be  increased  after  the  application 
to  Parliament  for  adoption  of  the  act;  (3)  that  such  company 
should  be  bound,  under  penalty,  to  publish  quarterly  in  the 
London  Gazette,  a  statement  showing  the  amount  of  its  debt, 
the  sum  required  for  payment  of  the  quarter's  interest  on  the 
same  and  the  actual  amount  of  net  profit  earned  during  the  same 
quarter.  It  was  thought  that,  with  these  particulars  before 
them,  the  public  could  at  once  detect  any  irregularities  in  a  com- 
pany's loan  capital,  and  that  in  the  absence  of  any  irregularities, 
a  profit  equal  to  10%  of  its  loan  capital  would  constitute  a  suf- 
ficient security  to  the  company's  debenture  holders. 

The  division  of  debentures  Into  convenient  units  representing 
£100  to  £1,000  was  enthusiastically  expected  to  have  an  impor- 
tant and  beneficial  effect.  Instead  of  a  person  who  wished  to  sell 
say  £5,000  railway  debentures  having  to  wait  until  he  could  find 
another  person  having  that  exact  sum  to  invest,  he  would  be 
able  to  divide  the  amount  among  a  number  of  purchasers.  By 
this  process,  transactions  would  be  greatly  facilitated  and  the 
market  extended.  Moreover,  when  the  debt  was  spread  over  a 
great  number  of  persons,  it  would  not  be  so  easy  for  a  combi- 
nation of  large  money-lenders  to  demand  repayment  of  loans  at 
inconvenient  times  so  as  to  embarrass  the  company  for  their  own 
benefit.  Thus  a  great  difficulty  with  which  the  companies  had 
to  contend  would  disappear.16 

Following  these  agitations  further  efforts  were  made  during 
the  years  from  1851  to  1853  to  effect  an  alteration  of  the  exist- 
ing debentures  by  the  issue  of  stocks  carrying  a  fixed  rate  of 
interest  and  affording  other  owners  the  same  privileges  as  the 
debentures,  in  lieu  of  the  existing  bonds.17  Parliament,  how- 
ever, failed  to  see  the  necessity  of  passing  any  act  to  accom- 
plish the  changes;  but  self-interest  induced  a  number  of  com- 
panies to  convert  their  debentures  into  such  perpetual  debenture 

is  Eailway  Times,  Sept.  25,  1852,  pp.  100-109. 
IT  Eailway  Times,  Dec.  31,  1853,  p.  1354. 


59]  SUPERVISION   OP  RAILWAY  CAPITALIZATION  59 

stocks.  The  innovation  was  looked  at  askance.  The  idea  was 
still  rife  that  loans  were  only  a  temporary  charge  which  ought 
to  be  gotten  rid  of  as  soon  as  possible.  Anything  which  had  to 
do  with  perpetuating  such  loans  at  once  aroused  suspicion.  In 
commenting  upon  such  practices,  the  Railway  Times  18  said  that 
such  operations  were  "suggestive  of  grave  reflection."  It  la- 
mented that  railway  companies  should  change  their  debts  into  a 
permanent  part  of  their  capitalization,  and  regarded  such  a 
change  as  an  unmistakable  evil.  It  urged  that  those  companies 
which  had  borrowed  to  a  large  extent  "would  do  well  to  make 
up  their  minds  to  pay  off  debentures  .  .  .  before  they  par- 
take of  any  dividends,  no  matter  how  moderate  or  legitimately 
earned."  "Every  proprietor  who  is  capable  of  serious  thought, 
and  who  desires  to  leave  an  unincumbered  estate  to  his  children 
should  make  it  his  duty  to  strive  for  an  extinction  of  the  loan 
debt  of  every  company  with  which  he  is  connected.  .  ."  It 
was  the  general  idea  that  when  a  company  was  out  of  debt  it 
was  out  of  danger.  But  it  soon  became  clear  that  the  debts  of 
railways,  once  contracted,  were  going  to  remain.  The  compa- 
nies clearly  realized  the  usefulness  of  these  debenture  stocks. 
This  class  of  securities  would  enable  persons  who  had  no  specu- 
lative desires,  who  had  no  enterprising  tastes,  who  had  no  prac- 
tical knowledge,  to  aid  in  the  successful  completion  of  splendid 
undertakings;  they  would  enable  such  persons  to  obtain  the  sin- 
gle object  which  they  desired  —  a  fixed  secure  income.19  But 
what  was  of  far  greater  importance  was  the  fact  that  debenture 
stocks  would  save  the  companies  from  being  swamped  by  de- 
bentures falling  due  at  unfortunate  times.  This  great  advan- 
tage, however,  was  not  clearly  recognized  until  some  years  af- 
terwards. It  was  the  need  of  money  which  gradually  led* a 
number  of  railway  companies  to  use  debenture  stocks. 

Beginning  with  the  fifties,  it  became  quite  general  for  rail- 
way companies  to  apply  to  Parliament  for  powters  to  create  this 
class  of  stock  for  the  purpose  of  paying  off  mortgages  and  bond- 
ed debts,  or  as  a  means  of  raising  money  in  lieu  of  borrowing 
on  mortgages  or  bonds.20     Therefore,  it  became  important  that 
the  legal  powers  under  which  the  old  debentures  should  be  ex- 
is  Ibid.,  May  8,  1852,  p.  473. 
i»  Economist,  May  2,  1863,  p.  477. 
20  Board  of  Trade,  General  Eeport  on  Shares,  Loam,  etc.,  1860,  p.  17. 


60  RAILWAY   FINANCE  IN   ENGLAND  [60 

tinguished  and  the  debenture  stocks  created,  should  be  clearly 
defined.  No  general  legislation  took  place.  What  Parliament 
did  was  to  insert  clauses  in  the  bills  of  the  companies  seeking 
powers  to  make  such  conversions  of  new  issues.  In  these  special 
acts,  Parliament  prescribed  in  detail  the  manner  in  which  such 
conversions  of  debentures  or  the  creation  of  new  debenture 
stocks  might  be  effected.  The  following  passage  from  the  Act 
of  1851  of  the  London  and  Northwestern  Railway 21  which  was 
one  of  the  most  important  companies  using  this  class  of  securi- 
ties, may  serve  to  show  in  what  way  Parliament  legislated  on  the 
issue  of  such  stocks: 

That  it  shall  be  lawful  for  the  company  from  time  to  time,  with  the  con- 
sent of  three-fifths  of  the  votes  of  the  shareholders  present  in  person  or  by 
proxy  at  any  general  meeting  of  the  company  convened  with  due  notice  of 
that  object,  to  resolve  that  any  portion  of  the  borrowed  capital  of  the  com- 
pany, or  any  debenture  or  other  security  for  which  or  for  the  interest 
whereof  the  company  are  lawfully  liable,  .  .  .  not  exceeding  an  amount 
to  be  defined  in  and  by  such  resolution,  may  be  converted  into  stock  of  the 
company  of  like  amount,  either  by  agreement  with  the  holders  of  such  mort- 
gages or  bonds  respectively  before  the  same  respectively  became  due,  and 
issuing  stock  of  a  corresponding  amount,  instead  of  reborrowing  the  same 
so  paid  off;  and  also,  with  the  like  consent,  from  time  to  time,  to  resolve 
that  the  whole  or  any  part,  to  be  defined  in  and  by  such  resolution,  of  the 
moneys  which  the  company  shall  have  authority  to  raise  by  borrowing  under 
the  powers  of  any  of  their  Acts,  .  .  .  shall  or  may  be  raised  by  the  cre- 
ation and  issue  of  stock  of  a  corresponding  amount,  instead  of  borrowing 
the  same;  and  also,  with  the  like  consent,  to  attach  to  the  stock  so  author- 
ized to  be  created  and  issued  for  any  of  the  purposes  aforesaid  a  fixed  and 
perpetual  irredeemable  yearly  dividend  or  interest  at  any  rate  not  exceed- 
ing the  rate  of  £3  10s.  for  every  £100  thereof;  .  .  .  and  the  stock  so 
created  and  issued  shall  be  a  charge  upon  the  tolls  and  undertaking,  and 
lands,  tenements,  and  hereditaments  of  the  company,  but  shall  be  distribut- 
able, transmissible,  and  transferable,  .  .  .  and  the  said  interest  or 
dividend  shall  forever  have  priority  of  payment  over  all  other  dividends  on 
any  other  stock  or  shares  of  the  company,  whether  ordinary  or  preference, 
or  guaranteed,  and  the  stock  when  so  created  shall  be  termed  ' '  London  and 
North  Western  Debenture  stock ; ' '  provided  that  nothing  herein  contained 
shall  in  anywise  prejudice  or  affect  the  rights  of  the  holders  of  mortgages 
or  bonds  of  the  company.  .  . 

Four  distinct  principles  were  set  forth  in  this  clause:     (1) 
Debenture  stocks  might  be  issued  in  redeeming  debentures  fall- 

21 15  V.  e.  cv.  Quoted  by  John  Whitehead  in  his  book  on  Guaranteed 
Securities,  1859,  pp.  x-xi. 


61]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  61 

ing  due  as  well  as  for  raising  additional  loan  capital  within  the 
company's  powers;  (2)  the  rate  of  interest  was  fixed  with  the 
consent  of  Parliament;  (3)  the  security  of  such  stock  should 
consist  in  a  charge  upon  "the  tolls  and  undertaking,  and  lands, 
tenements,  and  hereditaments"  of  the  company;  and  (4)  such 
stocks  were  to  be  "distributable,  transmissible,  and  transferable 
as  personal  estate."  It  must  be  remembered  that  some  of  these 
principles  were  not  new,  but  were  copied  from  those  governing 
the  issue  of  the  older  forms  of  securities.  On  close  perusal,  it 
may  be  seen  that  the  provisions  contained  in  the  clause  were 
such  as  to  make  the  debenture  stocks  a  safe  and  clearly-defined 
investment.  Indeed,  Parliament  had  by  this  time  recognized 
to  a  certain  extent  the  necessity  of  this  class  of  securities  for  the 
improvement  of  the  financial  condition  of  the  railways,  and 
commenced  to  take  steps  to  give  the  holders  of  debenture  stocks 
every  possible  protection  and  security.  Thus  in  the  act  just 
referred  to  provisions  were  made  to  the  effect  that  if  written 
demand  for  the  payment  of  dividend  due  on  any  debenture 
stocks  was  not  met  satisfactorily  within  thirty  days,  the  pro- 
prietors of  such  stocks  holding  an  amount  of  nominal  value  of 
£20,000  or  upwards  might,  without  prejudice  to  their  right  to 
sue,  require  the  appointment  of  a  receiver.22 

By  these  provisions,  the  debenture  stockholders  were  given 
the  power  to  recover  the  arrears  of  their  interest  either  by  bring- 
ing suit  in  any  competent  court  or  by  requiring  the  appointment 
of  receivers.  It  may  be  noticed,  however,  that  only  the  interest 
was  secured,  and  the  principal  was  not  mentioned.  There  was 
some  dissatisfaction  over  this  fact,  but  it  was  generally  con- 
ceded 23  that  so  long  as  the  interest  was  made  sure,  the  principal 
would  take  care  of  itself,  for  what  the  average  investor  wanted 
was  not  so  much  the  possession  of  his  principal  but  a  regular  and 
reliable  income  that  grew  out  of  the  principal.  This  was  es- 
pecially true  when  his  security  was  easily  marketable. 

The  chief  reason  why  Parliament  took  such  precautions  to 
give  great  security  to  the  holders  of  debenture  stocks  was  that 
there  was  an  abundance  of  money  ready  for  investment  and 
the  only  thing  necessary  to  induce  investors  to  come  forward 

22  15  V.  e.  cv.  XII. 

23  Economist,  Feb.  23,  1867. 


62  RAILWAY   FINANCE  IN   ENGLAND  [62 

was  indisputable  security.24  With,  this  point  in  view,  Lord 
Redesdale  in  1856,  endeavored  to  insert  a  clause  in  the  railway 
bills  of  that  session,  making  the  railway  directors  personally 
liable  for  any  illegal  issue  of  debenture  stocks;  but  this  prop- 
osition, which  if  adopted  might  have  prevented  much  trouble, 
was  " killed"  in  the  committee  room.25 

But  it  must  also  be  noticed  that  what  Parliament  did  was  for 
the  protection  of  the  holders  of  legal  securities.  If  one's  se- 
curity was  legal,  he  was  safe,  but  no  protection  was  extended  to 
the  holders  of  illegal  securities.  Parliament  prescribed  the  rules 
governing  the  issue  of  railway  securities,  and  laid  down  the 
principle  that  securities  issued  in  violation  of  these  rules  were 
illegal  and  hence  not  within  the  protection  of  law.  Per  se  this 
doctrine  appeared  proper  and  good.  But  how  were  the  investors 
to  know  which  securities  were  legal  and  which  were  not?  Par- 
liament gave  adequate  protection  to  the  holder  of  legal  securities, 
but  it  failed  to  enable  the  investors  to  distinguish  the  legal  from 
the  illegal.  Hence  in  spite  of  the  repeated  and  apparently  earn- 
est efforts  of  Parliament  much  dissatisfaction  existed.  Com- 
plaint was  heard  everywhere  as  to  the  difficulty  of  distinguish- 
ing the  legal  from  the  illegal  security.26 

To  determine  the  legality  of  a  security  required  an  under- 
standing of  a  number  of  acts  of  Parliament  which  the  ordinary 
investors  could  hardly  construe  correctly  without  a  lawyer 's  aid. 
Yet  if  these  acts  were  not  justly  construed  and  precisely  obeyed 
the  debenture  would  give  no  effectual  charge  upon  the  line,  and 
hence  the  holder  of  it  would  have  no  legal  claim  to  priority  over 
even  a  contracted  debtor  of  the  company.  Furthermore,  the 
nature  of  the  law  was  such  that  a  debenture  which  was  once 
bad  would  remain  bad.  A  debenture  which  was  invalid  at  its 
issue  because  it  was  in  excess  of  the  borrowing  powers,  would 
not  be  improved  because  other  debentures  were  paid  off.  The 
contract  was  illegal  when  it  was  executed,  and  it  could  not  gath- 
er legality  by  subsequent  payments  to  third  parties.27 

2*  Railway  Times,  Aug.  4,  1855,  p.  781. 

25  Hid.,  April  26,  1856,  p.  514. 

26  It  was  often  heard  in  bank  parlors,  ' '  How  do  we  know  this  debenture 
is  worth  anything?     The  validity  depends  on  its  accordance  with  the  bor- 
rowing powers  of  the  company,  and  what  those  powers  are,  or  how  they 
have  been  exercised,  we  do  not  know."     Compare  Economist,  July  11,  1863. 

27  Economist,  May  2,  1863. 


63]  SUPERVISION  OP  RAILWAY  CAPITALIZATION  63 

In  spite  of  this  unsatisfactory  state  of  affairs,  the  use  of  de- 
benture stocks  continued  to  become  more  extensive.  To  insure 
uniformity  in  practice  and  to  facilitate  the  use  of  such  stocks, 
the  Board  of  Trade  repeatedly  recommended,28  during  the  latter 
part  of  the  fifties,  that  provisions  should  be  made  in  a  general 
act  embodying  the  principles  governing  the  issue  of  such  stocks. 
Consequently  Parliament  in  1863  codified  into  general  law  the 
various  provisions  scattered  in  the  special  acts  as  well  as  some 
of  the  recommendations  of  the  Board  of  Trade.  A  large  part 
of  the  Companies  Clauses  Act  of  that  year 29  was  devoted  to  the 
regulation  of  debenture  stocks.  Provisions  were  made  as  to  the 
creation  and  issue  of  debenture  stocks,  the  priority  of  such 
securities,  the  limit  of  the  rate  of  interest  and  the  enforcement 
of  payment  of  such  interest  either  by  action  or  by  the  appoint- 
ment of  receivers.  The  companies  were  also  required  to  keep 
a  register  of  debenture  stocks  issued  and  to  deliver  certifi- 
cates to  holders  of  debenture  stocks,  etc.  In  short  practically 
all  the  provisions  contained  in  this  act  governing  the  creation 
and  issue  of  debenture  stock  were  modelled  after  those  govern- 
ing the  creation  and  issue  of  the  earlier  forms  of  securities,  and 
which  had  been  heretofore  inserted  in  special  acts. 

The  improvement,  however,  was  not  enough  to  meet  the  sit- 
uation. The  act  provided,  in  great  detail,  for  the  regulation  of 
the  debenture  stock  itself,  but  it  did  not  afford  any  effective 
means  for  the  enforcement  of  the  regulations.  It  gave  further 
protection  to  the  holders  of  legal  debentures;  but  it  again  failed 
to  evolve  any  means  by  which  one  might  be  enabled  to  tell  which 
debenture  was  a  legal  one  and  which  was  not.  In  brief,  it 
stopped  short  at  the  point  where  action  was  demanded.  Hence, 
in  spite  of  the  act,  little  improvement  was  made  to  clarify  the 
doubt  which  prevailed.  In  the  meantime  gross  encroachments 
upon  the  acts  of  Parliament  were  made. 

Being  at  a  loss  as  to  how  to  mend  the  situation,  Parliament 
appointed  a  select  committee  in  1863  to  inquire  as  to  what 
should  be  done  to  prevent  such  encroachments ; 30  and  the  work 
of  this  committee  was  continued  by  another  select  committee 
appointed  in  the  following  year.  Both  of  these  committees 

28  Board  of  Trade,  General  Report  on  Railway  Bills,  1861,  p.  23. 

29  26  &  27  V.  c.  118,  Part  III. 
so  Cf.  infra,  Chap.  IV. 


64  RAILWAY   FINANCE  IN   ENGLAND  [64 

were  of  the  opinion  that  holders  of  statutory  debentures  duly 
registered,  should  have  a  right  to  recover  and  secure  the  pay- 
ment of  all  principal  and  interest  due  to  them  in  priority  to  the 
holders  of  other  obligations  not  issued  under  the  authority  of 
Parliament.31  They  also  recommended  that  the  right  of  the 
public  to  the  use  of  the  railways  should  be  protected  and  that 
the  rolling  stock  and  plant  of  a  railway  should  never  be  seized 
by  creditors.  Moreover,  the  committee  recognized  the  evil  re- 
sulting from  the  lack  of  means  to  establish  the  legality  of  de- 
bentures. Therefore  it  was  also  urged 32  as  a  modified  protec- 
tion to  the  holders  of  such  debentures  that  there  should  be  a 
semi-annual  declaration  in  the  gazette  of  the  state  of  the  bor- 
rowing powers  of  the  company  and  an  endorsement  upon  each 
certificate.  This  was  not  expected  to  render  it  impossible  for 
the  companies  to  issue  debentures  beyond  their  borrowing  pow- 
ers; but  it  was  hoped  that  the  knowledge  of  the  fact  that  their 
misconduct  would  be  palpably  and  continually  kept  before  their 
own  eyes,  would  be  a  powerful  force  in  restraining  the  directors 
from  exceeding  such  borrowing  powers  to  any  considerable  ex- 
tent. Many  plans 33  for  verifying  the  legality  of  debentures 
were  proposed,  of  which  one  advocated  that  there  should  be  an 
examination  of  the  debenture  accounts  by  a  public  department, 
and  that  a  stamp  should  be  affixed  to  the  debenture  whose  le- 
gality had  been  ascertained.  It  was  also  urged  that  the  chair- 
man and  secretary  of  the  railway  company  should  be  required 
to  certify  under  their  hands  the  amount  of  debentures  at  any 
time  issued,  and  should  be  made  liable  to  penalty  if  the  amount 
was  false,  or  if  the  debentures  issued  were  in  excess  of  their  bor- 
rowing powers.  The  great  weakness  with  a  scheme  like  that  was 
that  it  did  not  provide  for  the  most  common  case  in  which 
debentures  were  issued  by  mistake.  As  the  directors  were  liable 
in  almost  all  cases  under  such  a  scheme  except  that  of  mistake, 
it  was  readily  recognized  that  such  a  scheme  would  not  prove 
very  effective. 

It  was  also  proposed  that  all  debentures  illegally  issued  should 
be  made  binding  on  the  company  and  have  a  claim  prior  to  the 
dividends  of  the  shareholders.  This  was  based  on  the  usual  as- 

31  Select  Committee  of  1864,  Report,  pp.  III-IV. 

32  Evidence  before  select  committee  of  1864,  p.  27. 
as  Economist,  July  11,  1863. 


65]  SUPERVISION  OP  RAILWAY   CAPITALIZATION  65 

sumption  that  the  shareholders  appointed  the  directors  who 
managed  the  business  and  should,  therefore,  be  liable  for  their 
misconduct.  But  it  was  recognized  that  ' '  considering  how  little 
!real  influence  most  shareholders,  in  fact,  have  in  the  appoint- 
ment of  the  directors,  it  appeared  rather  hard  to  reduce  their 
dividends  if  the  directors  are  dishonest.  .  . " 34 

Parliament,  however,  was  not  ready  to  adopt  any  of  these 
propositions.  So  the  situation  drifted  from  bad  to  worse.  The 
goodness  of  debentures  and  the  repayment  of  the  money  bor- 
rowed, as  in  the  case  of  the  Great  Eastern,35  became  the  subject 
of  a  complicated  controversy  even  between  the  directors  and  the 
deputy  chairman  of  the  company.  The  one  would  say  that  bad 
securities  had  been  issued,  while  the  other  would  deny  the 
charge;  and  the  world  had  to  judge  between  them.  In  some 
cases  debentures  were  issued  when  no  real  capital  whatever  had 
been  subscribed.  As  in  the  case  of  the  Eastern  Section  Rail- 
way,36 certain  ''receipts"  were  exchanged  between  a  financial 
agent  and  the  company  by  which  transaction  "apparent  cap- 
ital" was  created.  Thus  the  parliamentary  requirements  and 
restrictions  were  utterly  disregarded.  But  this  case  was  not 
the  worst.  Some  men  who  were  known  to  have  "the  greatest 
repute  for  integrity  and  the  highest  standing,"  went  so  far  as 
to  "pawn"  debentures  not  only  in  an  illegal  manner,  but  even 
for  fraudulent  purposes.  As  revealed  in  the  case  of  the  London, 
Chatham  and  Dover  Railway,37  supposedly  genuine  debentures 
issued  by  the  company  were  found  later  to  have  "nothing  in 
them."  In  defence  of  the  company,  one  of  its  directors  de- 
clared that  those  "debentures  were  not  debentures  at  all."  He 
admitted  that  he  had  obtained  money  on  them,  but  he  said 
"They  were  not  worth  anything."  They  were  "quasi  things" 
and  the  good  securities  were  elsewhere.  It  was  no  wonder, 
therefore,  that  the  whole  basis  of  railway  credit  was  utterly 
shaken. 

To  make  things  still  worse,  the  treacherous  instrument  called 
Lloyd 's  bonds 38  also  appeared  in  the  financial  market  about 

a*  Economist,  July  11,  1863. 

35  Economist,  Aug.  12,  1865,  p.  970. 

36  Economist,  Oct.  27,  1866. 

37  Economist,  Oct.  27,  1866. 

38  For  a  description  of  these  bonds  cf.  supra,  p.  19. 


66  RAILWAY   FINANCE  IN   ENGLAND  [66 

this  period.  What  followed  was  but  natural.  Distrust  and  dis- 
satisfaction over  railway  securities  was  felt  everywhere.  It 
was  urged  that  the  government  should  see  to  it  that  the  law  was 
complied  with.  A  loud  cry 39  was  also  raised  demanding  that 
government  should  stamp  all  the  debentures  issued  as  it  stamped 
money  and  "ascertained  the  qualities  of  schoolmasters/'40  so 
that  only  the  allowed  number  would  be  permitted  to  circulate. 

Nothing,  however,  was  done  by  Parliament  to  meet  the  de- 
mands. In  the  meanwhile  the  railway  panic  of  1865-1867,  which 
was  the  result  as  well  as  the  cause  of  the  growing  distrust  in 
railway  debentures,  was  setting  in,  during  which  a  number  of 
companies  suffered  great  embarrassments.  The  credit  of  some 
railway  companies  like  that  of  the  South  Eastern  was  greatly 
injured  on  account  of  the  pressure  brought  about  by  the  re- 
newal of  their  debentures.  Other  companies,  like  the  London, 
Chatham  and  Dover,  met  with  "utter  and  disgraceful  failure"  41 
due  to  similar  causes.  What  was  even  of  greater  consequence 
was  the  effect  of  such  happenings  upon  the  credit  of  the  whole 
railway  system.  The  accidental  circumstances  of  mere  neigh- 
borhood to  the  "exploded"  companies  was  construed  into  some 
participation  in  their  faults.  In  the  midst  of  this  chaos,  a  royal 
commission  was  appointed  to  examine  the  whole  matter,  with  a 
view  toward  government  purchase  as  a  solution  of  the  problem. 
Parliament  intended  to  postpone  all  action  until  the  commission 
had  finished  its  work;  but  the  prevailing  difficulties  made  early 
action  necessary.  Therefore,  in  1866  the  Railway  Companies 
Securities  Act 42  was  passed  for  the  purpose  of  remedying  the 
situation. 

By  1867  the  panic  subsided ;  but  the  old  ominous  controversy 
over  the  nature  and  value  of  railway  securities  was  still  rife. 
In  fact  it  held  all  other  financial  matters  in  abeyance.  Of  the 
aggregate  railway  capital  of  about  £450,000,000  more  than  27% 
represented  debenture  debts,43  the  number  of  investors  in  such 
securities  numbered  no  less  than  100,000.44 

sa  Economist,  Nov.  17,  1866. 

40  Ibid.,  Oct.  27,  1866. 

41 Ibid.,  1866,  pp.  1484-1485. 

42  29  &  30,  V.  e.  108.     Cf.  infra,  Chap.  V. 

43  London  Times,  Feb.  6,  1867,  p.  9. 
4*  Hansard,  185:  297. 


67]  SUPERVISION   OF  RAILWAY   CAPITALIZATION  67 

Meanwhile  the  current  belief  was  that  a  man  lending  money 
upon  a  debenture,  lent  it  upon  a  mortgage  not  only  of  the  in- 
come, but  also  of  the  property  of  a  railway  company.  But  this 
belief  was  shattered  by  the  decision  of  the  Lord  Justice  in  the 
London,  Chatham  and  Dover  Company's  land  case,46  in  which 
the  principle  governing  the  question  was  laid  down  at  some 
length.  It  was  held  that  the  holders  of  railway  debentures  were 
not  only  without  any  immediate  hold  on  the  general  property 
of  the  undertaking  as  distinguished  from  its  income,  but  were 
not  entitled  to  any  claim  to  the  rents  or  proceeds  from  the  sale 
of  the  company's  surplus  land.  In  other  words,  the  debenture- 
holders  had  only  a  hold  on  the  tolls  and  earnings  of  the  line  and 
not  on  the  property  of  the  company.  The  whole  question  seem- 
ed to  have  turned  on  the  interpretation  given  to  the  word  "un- 
dertaking" in  the  security  which  the  debenture-holders  received, 
for  their  money.  The  popular  idea  was  that  by  that  term  the 
debenture-holders  were  mortgagees  of  the  whole  property  and 
effects  of  the  company.  But  the  court  held  that  the  object  and 
intentions  of  the  legislature  were  to  create  a  railway  "which 
was  to  be  made  and  maintained,  by  which  tolls  and  profits  were 
to  be  earned,  and  which  was  to  be  worked  and  managed  by  a 
certain  company.  .  ."  "The  whole  of  this  when  in  operation 
is  the  word  contemplated  by  the  Legislature,  and  it  is  to  this 
that  the  name  undertaking  is  given." 

This  decision  and  the  financial  depression  of  1865-1867  brought 
to  light  the  following  broad  and  practical  points  regarding  rail- 
way debentures.46 

First.  The  Court  of  Chancery  would  not  undertake  to  man- 
age a  railway  for  the  debenture  holders.  It  was  true  that  in 

45  During  those  years  many  companies  acquired,  either  accidentally  or 
involuntarily,  more  land  than  they  ultimately  needed,  and  such  lands  sooner 
or  later  were  resold,  so  that  the  proceeds  might  revert  to  the  capital  of  the 
concern.  The  London,  Chatham  and  Dover  more  than  other  companies,  had 
a  considerable  amount  of  such  lands  which  was  valued  at  about  £1,000,000. 
The  debenture-holders,  naturally  enough,  desired  to  establish  their  claims 
upon  this  as  well  as  other  properties  of  the  company,  and  applied  to  the 
Court  of  Chancery  for  a  receiver  to  take  and  hold  for  their  benefit  the  pro- 
ceeds from  the  disposal  of  such  lands  when  sold  and  the  rents  in  the  mean- 
time. It  was  on  this  claim  that  the  decision  referred  to  in  the  text  was 
rendered.  Cf.  London  Times,  February  6,  1867,  p.  9. 

«  Economist,  Feb.  2,  1867. 


68  RAILWAY   FINANCE   IN   ENGLAND  [68 

some  cases  the  Court  of  Chancery  did,  for  limited  periods,  un- 
dertake the  management  of  large  concerns;  but  this  was  done 
with  the  view  of  winding  up  that  concern.  But  it  could  not 
wind  up  a  railway.  A  railway  was,  as  had  been  recognized 
then,  an  unending  business  and  the  court  could  not  wind  it  up. 

Second.  The  debenture-holders  could  hardly  manage  the  rail- 
way in  case  their  interest  and  principal  were  in  arrear,  even  if 
they  wanted  to  do  so.  They  were  not  a  corporate  body.  They 
could  not  appoint  directors  to  manage  for  them.  The  majority 
of  all  but  one  had  no  more  legal  capacity  than  the  one. 

Third.  The  debenture-holders  had  not  even  a  preferential 
claim  or  mortgage  on  any  outlying  surplus  land. 

Fourth.  The  debenture-holders  could  not  sell  the  railway. 
The  right  of  building  the  railway  was  given  by  Parliament  to  a 
certain  specific  company.  Neither  that  company,  nor  any  law 
court  could  sell  it  save  by  the  assent  of  Parliament.  "Once  a 
railway  company,  always  a  railway  company. ' '  It  was  a  sort  of 
a  consecrated  entity,  which  only  Parliament  could  create,  and 
which  only  the  same  body  could  change. 

Fifth.  The  mortgagees  could  not  split  their  securities  in  spite 
of  the  Act  of  1863,  the  old  form  of  debentures  representing  lump- 
sums  of  money  being  still  the  most  common  form  of  securities 
issued  by  railway  companies.  Thus  the  investors  must  take  the 
security  as  a  whole  and  as  a  unit,  and  as  they  found  it. 

But  the  real  state  of  affairs  was  not  as  objectional  as  these 
difficulties  would  suggest.  All  but  the  last  of  these  drawbacks 
applied  only  to  the  poorer  roads,  which  were  in  difficulty,  and 
did  not  have  any  reference  to  the  debentures  of  strong,  solvent 
companies. 

But  the  most  objectionable  drawback  of  the  railway  debentures 
was  the  falling  due  of  such  securities  at  fixed  and  often  unfor- 
tunate seasons.  This  was  fairly  recognized  in  the  early  fifties, 
but  was  made  clear  during  the  depression.  Experience  had 
taught  the  hitherto  credulous  that  short-period  debentures  were 
dangerous  and  uncontrollable,  "a  lottery  within  themselves." 
Some  companies  "highest  in  credit,  most  secure  in  revenue  .  .  . 
unassailable  in  repute  found  themselves  ...  as  helpless  as  the 
vilest  excrescence  which  had  been  able  to  foist  itself  into  the 
family  of  railway  interests.  .  ."  Thus  the  Railway  Times 


69]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  69 

urged  that  short-period  debentures  be  abolished  and  in  place 
debenture-stocks  issued  at  such  a  rate  of  interest  as  would  estab- 
lish for  them  an  immediate  and  permanent  popularity.  The 
Economist  also  advocated  that  in  the  interest  of  the  companies 
as  well  as  the  investors,  it  was  essential  that  a  large  portion  of 
the  existing  110  millions  sterling  of  debenture  bonds  which 
would  mature  at  fixed  periods,  very  often  without  any  or  at 
least  with  insufficient  notice,  should  be  changed  into  debenture 
stocks,  representable  in  consols  at  the  option  of  the  holder,  by 
certificate  to  bearer  in  coupon  form.  Some  members  of  Parlia- 
ment 4T  also  recognized  the  evil  of  the  existing  system  of  deben- 
tures. Many  solvent  companies  were  often  placed  in  consid- 
erable embarrassment  by  the  claims  of  the  holders  of  such  short- 
period  debentures.  Indeed,  to  permit  a  large  amount  of  capital 
raised  with  short-period  debentures  to  be  sunk  in  a  fixed  under- 
taking was  regarded  as  a  great  error  on  the  part  of  Parliament.48 
The  legislature  was  forced  to  recognize  this  evil,  when  borrowers 
were  compelled  to  come  constantly  or  "almost  hourly"  before  it 
for  renewals  of  their  loans.49 

Under  such  conviction,  many  people  firmly  believed  that  per- 
manent debenture-stocks  should  be  created  in  place  of  the  exist- 
ing ' '  accommodation  bills, ' '  as  the  railway  debentures  were  called. 
It  was  urged  50  that  this  reform  would  not  only  save  the  com- 
panies the  periodical  recurrence  of  the  danger  inherent  with  the 
falling  due  of  short-period  debentures,  but  would  also  mean  an 
immediate  source  of  saving  in  money  and  trouble  to  the  railways. 
It  would  relieve  the  railways  from  the  trouble  of  stamping,  and 
would  save  the  commissions  and  fees  to  lawyers  and  brokers  as 
well  as  the  wages  of  the  staff  of  clerks  employed  for  managing 
the  debenture  business.  Therefore,  new  debenture-stocks  should 
be  issued  to  shareholders  in  place  of  dividends,  and  this  pro- 
cedure, it  was  thought,  would  prove  acceptable  to  the  share- 
holders. 

Another  defect  of  the  law  which  was  brought  to  light  by  the 
financial  depression,  and  which  led  to  an  enlightened  and  most 

«  Hansard,  185:  785. 

48/&id.,  186:  1030. 

« Ibid. 

so  London  Times,  March  23,  1867,  p.  12. 


70  RAILWAY   FINANCE  IN   ENGLAND  [70 

beneficial  enactment,  was  the  fact  that  the  debenture  holders 
had  no  preferential  claim  on  the  rolling  stock  which  formed  the 
implement  of  the  trade.  In  the  absence  of  any  adequate  pro- 
tection for  the  rolling  stock,  even  if  the  debenture-holders  did 
unanimously  concur  in  the  management  of  a  railway  to  com- 
pensate their  losses  in  interest  or  principal,  they  would  still  be 
in  danger  of  having  the  carriages  seized  by  the  contractor,  the 
engine  maker,  or  any  other  casual  creditor  of  the  company. 
The  debenture  mortgage  was  on  the  "tolls  or  fares"  of  the  rail- 
way, and  there  was  no  specific  pledge  of  the  carriages.51  There- 
fore legislation  was  needed  to  keep  the  railway  intact  in  order 
to  safeguard  the  security  upon  which  the  debenture-holders  had 
a  claim,  namely:  the  earnings  of  the  company. 

As  might  have  been  expected,  the  panic  of  1865  and  the  re- 
sultant discoveries  regarding  the  validity  and  securities  of  rail- 
way debentures  created  a  widespread  alarm  among  the  owners 
of  these  securities,  which  fact  in  turn  involved  many  railway 
companies  in  serious  embarrassment.  Interest  to  the  amount 
of  one-half  to  one  per  cent  higher  than  should  have  been  paid 
according  to  the  natural  state  of  the  money  market  had  to  be 
offered  in  order  to  induce  investments.52  It  became  essential  for 
Parliament  to  take  action  in  order  to  remove  such  alarm.  More- 
over, the  fact  that  the  class  of  people  who  invested  in  such 
securities  were  those  who  needed  the  greatest  protection  made 
immediate  action  necessary.53  Early  in  1867  the  Railway  De- 
benture Holders  Bill  was  introduced  to  prevent  any  one  class 
of  creditors  from  injuring  the  public  and  other  losses  of  cred- 
itors by  seizing  the  rolling  stock  so  as  to  stop  the  working  of 
the  line.54  This  measure,  before  being  presented  to  Parlia- 
ment, was  submitted  to  and  approved  by  "the  highest  authori- 
ties" of  the  leading  railways  and  was  also  approved  by  the  At- 
torney General.55  What  the  bill  asserted  was  that  the  whole  un- 
dertaking, engines,  carriages  and  all,  formed  the  security  of  the 
debenture  holder,  and  that  other  creditors  should  be  forbidden 
from  seizing  engines  or  any  part  of  the  plant,  or  in  any  way 

6i  Economist,  February  2,  1867. 
52  Hansard,  185:   787. 
sa  Hansard,  185:  781. 

54  The  bill  was  introduced  on  Feb.  12,  1867.     Hansard,  185 :  297-299. 

55  Hansard,  185 :  781. 


71]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  71 

breaking  up  the  "living  whole"  on  which  the  conveyance  and 
convenience  of  the  public  as  well  as  the  money  of  the  mort- 
gagees depended. 

This  measure  was  regarded  as  both  timely  and  helpful  in  es- 
tablishing the  desirability  of  debentures.  "No  one  could 
doubt, ' '  remarked  the  Economist™  ' ' that  this  enactment  is  bene- 
ficial. It  amounts  to  preserving  the  interest  of  the  mortgages 
from  all  danger,  if  the  line  yields  money  enough  to  pay  it,  be- 
cause the  whole  earning  machine  is  kept  together  and  intact  to 
make  what  gains  it  can." 

It  was  also  felt  in  Parliament  that,  in  the  existing  feverish 
state  of  the  public  mind,  any  attempt  to  oppose  such  a  measure 
as  the  Railway  Debenture  Holders  Bill  might  conduce  to  the 
spread  of  panic  and  to  create  the  impression  that  Parliament 
was  not  anxious  to  strengthen  the  position  of  the  debenture- 
holders.57  Nevertheless,  the  bill  was  shelved  for  a  while  after 
the  second  reading. 

Being  deeply  impressed  by  the  need  of  protection  to  the  de- 
benture-holders, some  members  evidently  grew  impatient  with 
the  lack  of  action  of  Parliament.  Consequently  early  in  April, 
1867,58  a  resolution  was  introduced  into  the  House  of  Commons 
to  the  effect  that  ' '  in  case  where  adequate  security  can  be  given, 
the  state  should  assume  the  responsibility  of  the  debenture  debt 
of  railway  companies  unable  to  meet  their  engagements,  upon 
conditions  providing  for  the  eventual  acquisition  of  such  rail- 
ways by  the  state  upon  terms  of  mutual  advantage."  In  fact 
the  matter  of  government  guarantee  had  been  thought  of  for 
some  time.  In  the  previous  year  it  was  announced  that  the 
cabinet  intended  to  adopt  a  plan  for  giving  a  government  guar- 
antee to  railway  debentures  and  for  obtaining  a  sum  of  money 
applicable  to  the  payment  of  the  national  debt  by  that  means. 
The  scheme  was  proposed  in  various  forms,  but  in  its  essence  it 
was  this:  that  the  government  should  borrow  the  money  need- 
ful for  railways  at  the  cheapest  rate  it  could  in  the  market,  and 
lend  it  to  the  railways  at  what  was  called  a  "just"  rate,  namely, 
a  rate  which  railways  had  been  paying.  This  process,  it  was 

se  Economist,  February  23,  1867. 

57  Hansard,  185 :  788. 

58  The  resolution  was  introduced  by  E.  W.  Crawford  on  April  2,  1867. 
See  Hansard,  186:  1025-1063. 


72  RAILWAY   FINANCE  IN   ENGLAND  [72 

hoped,  would  on  the  one  hand  enable  the  railways  to  obtain 
money  upon  fairer  terms  than  they  otherwise  could,  and  on  the 
other  hand,  enable  the  government  to  gain  the  difference  be- 
tween the  rate  which  it  would  have  to  pay  and  that  which  it 
would  charge.59 

So  far,  so  good.  But  serious  objections  were  at  once  detected. 
In  the  first  place  it  was  recognized  that  the  chief  reason  why  the 
government  was  an  easy  borrower  —  a  borrower  at  low  terms  — 
was  because  it  was  a  small  borrower.  Even  then,  there  were 
many  dealers  who  declared  that  the  public  were  withdrawing 
from  investment  in  "consols."  If  a  large  new  loan  were  asked 
for,  it  would  likely  tax  the  credit  of  the  government  to  such  an 
extent  as  to  necessitate  a  great  depreciation.  But  it  was  argued, 
not  without  reason,  that  the  proposed  loan  to  pay  off  railway  de- 
bentures would  not  constitute  a  loan  for  new,  additional  money. 
The  capital  represented  in  these  debentures  had  been  sunk  years 
ago.  All  that  was  needed  was  a  transfer  from  the  books  of  the 
railways  to  that  of  the  government.  To  this  it  was  replied  that 
such  a  transfer  was  precisely  what  would  impair  the  credit  of 
the  government.  Its  securities  were  then  at  a  scarcity  value. 
The  money  to  be  attracted  by  a  low  rate  of  interest  was  limited 
and  could  not  be  much  augmented.  Consols  were  once  sold  for 
less  than  half  of  their  face  value,60  and  it  was  not  beyond  possi- 
bility that  a  disastrous  event  like  a  war  might  occur  to  necessi- 
tate large  loans.  In  such  case,  a  government  guarantee  would 
prove,  it  was  feared,  exceedingly  embarrassing,  if  not  disastrous. 

Moreover,  even  if  the  borrowing  could  have  been  done  prop- 
erly, it  was  still  almost  impossible  for  the  government  to  fix  the 
"just"  rate  at  which  to  lend  to  the  different  railways.  The  nat- 
ural test  of  a  proper  rate  of  interest  was  the  test  of  the  market. 
The  railways  which  the  public  trusted  would  get  their  money  on 
good  terms;  those  which  the  public  distrusted  would  get  it  on 
bad  terms.  But  it  was  asked,  how  could  a  government  charge 
one  railway  5%  and  another  railway  4%.  There  would  at  once 
be  a  cry  of  favoritism.  Such  a  process  would  not  only  give  rise 
to  much  complaint,  but  would  also  offer  a  strong  temptation  to 
the  different  lines  to  corrupt  the  officials  who  had  charge  of  de- 

59  Economist,  November  17,  1866. 

«o  In  1797  consols  were  sold  at  47.     Cf.  Economist,  November  17,  1866. 


73]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  73 

termining  the  rates  of  interest.  Therefore  it  was  urged  that  the 
true  function  of  a  government  in  relation  to  railway  credit  was 
to  see  that  the  law  was  complied  with.  The  government  should 
use  not  its  faculty  of  borrowing,  but  its  function  of  verification. 
Thus  neither  the  resolution  of  Mr.  Crawford  nor  the  sentiment 
of  the  cabinet  in  favor  of  government  guarantee,  resulted  in  any 
action  by  Parliament. 

But  many  members  of  Parliament  clearly  saw  that  something 
must  be  done  to  prevent  the  spread  of  discredit  over  railway  de- 
bentures. Therefore,  soon  after  the  withdrawal  of  Mr.  Craw- 
ford's resolution  just  referred  to,  the  Railway  Companies  Ar- 
rangement Bill  was  introduced  by  the  Secretary  of  State  for 
India.  This  bill,  after  being  read  a  second  time,  was,  in  con- 
junction with  the  Debenture  Holders  Bill,  referred  to  a  select 
committee,  and  the  two  bills  were  "fused"  into  the  Railway 
Companies  Bill.61  This  measure  was  regarded  as  of  great  im- 
portance. Lord  Redesdale  was  even  of  the  opinion  that  if  it  had 
been  introduced  twenty  years  earlier  it  might  have  prevented 
many  of  the  difficulties  in  which  the  railway  companies  had  be- 
come involved.62 

When  the  bill  was  discussed  in  the  House  of  Lords,  a  proviso 
was  urged  to  the  effect  that  whenever  a  company  created  any  de- 
benture stock  having  a  higher  rate  of  interest  than  5%,  it  should 
fall  to  that  rate  at  the  end  of  seven  years.63  But  the  Duke  of 
Richmond  pointed  out  that  the  question  of  limiting  the  rate  of 
interest  had  been  thoroughly  discussed  by  the  committee  which 
examined  the  bill.  This  committee  felt  that  the  companies  which 
required  such  arrangements  were  in  most  cases  —  probably  in  all 
cases  —  the  best  judges  of  what  they  needed,  and  that  they  ought 
to  be  left  to  borrow  money  in  the  manner  which  they  thought 
best.  If  they  could  borrow  at  5%  they  were  not  likely  to  pay 
6%  for  it.  Therefore,  it  was  thought  unjustifiable  for  Parlia- 
ment to  restrict  the  companies  in  fixing  the  rates  of  interest.64 

But  the  most  important  and  the  most  warmly  opposed  part  of 
the  bill  was  that  which  prohibited  creditors  from  seizing  the 
rolling  stock  of  railways.  This  modification  of  the  established 

ei  Hansard,  187:  1723-1724. 

62/&uZ.,  188:  491. 

63 /bid.,  189:  157. 

6*  Hansard,  189:  157-158. 


74  RAILWAY   FINANCE   IN   ENGLAND  [74 

law  by  adding  to  the  legal  mortgages  of  the  land  estate,  as  it  was 
called,  all  the  personal  property  that  might  happen  to  be  upon 
it  was  looked  upon  as  too  great  a  change.85 

It  was,  however,  clearly  recognized  that  it  would  be  very  in- 
convenient to  the  public,  who  also  had  a  right  in  railways,  to 
have  the  rolling  stock  of  the  company  seized  by  individual  cred- 
itors, to  say  nothing  of  the  undesirability  of  destroying  the  rea- 
sonable security  of  the  debenture-holders,  who  were  the  first 
creditors.  "When  a  law  gave  occasion  for  the  stoppage  of  the  na- 
tion's commerce,  it  should  be  modified  even  if  it  were  of  old 
standing.66 

An  objection  was  raised  against  such  a  proposition  on  the 
ground  that  it  would  deprive  the  trade  creditor  of  his  security. 
It  would  give  the  debenture-holders  an  unwarrantable  advantage 
over  all  other  creditors  of  a  railway  company,  with  the  single 
exception  of  the  tax  gatherers.  It  was  feared  that  a  case  might 
occur  where  a  contractor  engaged  in  constructing  a  line  and  de- 
siring payment  when  the  line  was  finished,  would  be  unable  to 
put  in  an  execution  for  payment  in  case  the  company  had  issued 
debentures.  The  contractor  for  casual  repairs,  too,  might  be 
brought  into  such  a  predicament  under  similar  circumstances. 
For  these  reasons,  a  member  of  the  House  of  Commons  seriously 
opposed  the  measure,,  and  thought  that  it  would  be  more  appro- 
priate to  call  such  a  measure  railway  companies  creditors'  de- 
finance  bill  instead  of  railway  debenture-holders'  bill.67 

Those  in  favor  of  the  measure,  however,  denied  that  such 
could  be  the  case.  However,  even  if  it  did  so  affect  the  security 
of  such  trade  creditors,  that  fact  alone  was  not  sufficient  to  make 
the  measure  undesirable.  Inasmuch  as  the  bulk  of  the  railway 
revenue  was  received  in  cash,  railway  companies  should  pay  cash 
for  their  stores,  labor,  etc.,  and  should  not  get  into  debt  on  their 
account.  Moreover,  there  was  in  fact  a  large  amount  of  property 
left  untouched  by  the  bill  which  could  be  seized  by  such  trade 
creditors,  if  such  a  course  became  really  necessary.  In  addition, 
the  trade  creditors  had  recourse  to  appointing  receivers.68 

es  Hansard,  185 :  783-784. 
wlbid.,  185:  784. 
67  Ibid.,  185:  783. 
185:  782. 


75]  SUPERVISION  OP  RAILWAY  CAPITALIZATION  75 

The  opponents  to  the  measure  further  contended  that  the 
clause  would  encourage  solvent  companies  to  delay  the  payment 
of  their  debts.  Moreover,  it  was  inexpedient  to  oblige  the  cred- 
itors of  solvent  companies  to  resort  to  the  "cumbrous  and  per- 
haps tedious"  plan  of  getting  a  receiver  appointed.  If  a  railway 
were  insolvent,  it  would  itself  apply  for  the  appointment  of  such 
receivers.  In  other  words,  in  the  case  of  solvent  companies,  it 
would  be  impracticable  and,  in  the  case  of  the  insolvent,  it 
would  be  unnecessary  for  the  trade  creditor  to  have  recourse  to 
the  appointment  of  receivers.  Hence  he  would  get  no  protec- 
tion whatever  from  the  clause  providing  for  the  appointment  of 
such  receivers.69 

To  this  it  was  answered  that  a  creditor  would  have  ample  rem- 
edy inasmuch  as  a  solvent  company  would,  under  the  provisions 
of  the  bill,  make  immediate  payments,  while  a  receiver  should  be 
appointed  in  the  case  of  insolvent  companies.  No  company  that 
was  solvent  would  think  for  an  instant  of  allowing  a  receiver  to 
be  appointed.70  It  was  also  urged  that  if  the  trade  creditors  had 
the  power  of  selling  the  rolling  stock,  there  would  be  a  serious 
effect  upon  the  shareholders.  Such  powers  might  be  pressed  at 
inconvenient  moments  with  the  intention  of  bringing  down  the 
shares  to  a  point  far  below  their  value,  and  then  the  very  men 
who  had  assisted  in  bringing  about  that  unfortunate  state  of  af- 
fairs might  step  in  and  make  a  handsome  fortune  out  of  the  mis- 
fortune of  others.71  It  was  further  pointed  out  that  it  was  only 
the  small  creditors  who  would  ever  be  tempted  to  seize  the  roll- 
ing stock.  It  would  never  be  worth  the  while  of  large  creditors 
to  do  so.  No  railway  which  had  the  slightest  regard  for  its  own 
reputation  would  permit  its  rolling  stock  to  be  seized  for  the 
purpose  of  securing  small  debts.72  Furthermore,  the  measure 
was  not  directed  against  existing  creditors.  As  to  future  cred- 
itors, they  would  be  given  their  credit  with  the  full  knowledge 
that  they  could  not  levy  execution  in  case  of  default  in  payments. 
Thus  they  would  be  duly  aware  of  what  their  securities  were. 
To  give  such  creditors  the  power  to  apply  to  the  Court  of  Chan- 

69  Hansard,  187 :  1725. 
•ro  Ibid.,  187:  1726. 
"/few*.,  187:  162. 
72  Hansard,  189 :  162. 


76  RAILWAY   FINANCE   IN   ENGLAND  [76 

eery  for  the  appointment  of  a  receiver  to  seize  the  tolls  of  the 
railway  was  regarded,  therefore,  as  ample  protection.73 

The  opponents  also  endeavored  to  introduce  an  amendment  to 
the  measure  that  should  retain  the  power  of  seizing  the  rolling 
stock  in  the  hands  of  the  creditors,  unless  the  Court  of  Chancery 
should  appoint  a  receiver.  But  this  amendment  was  defeated.7* 

Another  new  and  seriously  contested  section  of  the  bill  was 
the  so-called  "arrangement"  clause,  providing  for  the  creation 
of  "pre-preference"  stocks.75  This  provision  was  opposed  on  the 
ground  that  it  would  interfere  seriously  with  the  rights  of  the 
holders  of  the  some  £150,000,000  in  debentures.76  Persons  who 
advanced  money  on  debentures  did  so  in  the  belief  that  they  had 
a  first  claim  upon  the  company's  receipts;  but  if  Parliament 
should  confer  the  power  of  creating  preference  stocks,  the  public 
would  be  unwilling  to  advance  any  more  money  upon  this  class 
of  securities  in  the  future.  It  might  be  proper  to  permit  the 
creation  of  such  pre-preference  stocks  by  special  act  when  the 
particular  circumstances  warranted  such  a  procedure;  but  it 
would  be  impolitic  to  confer  such  powers  by  a  general  act.77 

There  was  also  much  opposition  among  the  holders  of  railway 
debentures  as  shown  by  the  fact  that  a  formal  protest  was  lodged 
against  such  a  provision  being  inserted  in  private  bills  of  the 
session  by  a  large  number  of  bankers  and  lawyers,  as  well  as  by 
many  prominent  railway  men,  in  behalf  of  the  holders  of  railway 
debentures.78  These  petitioners  claimed  that  the  effect  of  such 


187:  1725. 

74  Hid.,  187  :  1722. 

75  Pre-pref  erence  stocks  were  securities  issued  in  excess  of  a  company  'a 
borrowing  powers  in  case  that  company  became  unable  to  meet  its  engage- 
ments with  its  creditors.     The  first  instance  of  the  issue  of  such  stocks  was 
that  of  the  Caledonian  Railway.     In  1851  that  company  obtained  powers 
from  the  House  of  Commons  to  issue  debentures  in  excess  of  its  powers,  for 
the  purpose  of  paying  its  debts.     At  the  time  the  company  was  in  a  state 
of  great  embarrassment,  and  the  course  adopted  proved  beneficial.     It  was 
pointed  out  in  Parliament  that  in  that  case  the  creation  of  the  additional 
debentures  (pre-preference  stock  was  not  the  name  used)  was  equal  to  put- 
ting a  charge  over  the  preference  shareholders.     Hansard,  187:  1246.     For 
further  discussion  of  this  provision  in  Parliament,  cf.  Hansard,  vols.  186- 
189,  under  Railway  Companies  Bill,  1867. 

76  Hansard,  189:  159-160. 

77  Ibid.,  188:  590-492,  and  189:  163. 
i&  Railway  Times,  July  22,  1897. 


77]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  77 

a  provision  would  be  to  depreciate  or  bring  into  disrepute  the 
security  hitherto  attached  to  acts  of  Parliament.  It  was  claimed 
that  "a  large  proportion  of  these  securities  were  held  by  trus- 
tees for  infants,  married  women  and  widows,  or  by  persons  of 
fixed  income,  who  invested  their  means  in  such  securities  upon 
the  faith  of  the  acts  of  Parliament,  and  that  such  persons  would 
have  never  made  any  such  investments  had  they  supposed  that 
Parliament  would  permit  their  rights  to  be  affected  by  a  later 
issue  of  securities  of  prior  lien." 

After  being  committed  and  recommitted  and  modified  in  many 
respects,  the  bill  was  passed  and  became  the  Railway  Companies 
Act  of  1867.  The  first  important  section  of  this  act  provided 
that  the  creditors  of  a  railway  company  might  obtain  the  ap- 
pointment of  a  receiver,  and  if  necessary,  of  a  manager,  on  ap- 
plying to  the  Court  of  Chancery  to  manage  the  railway,  but  that 
the  ' '  rolling  stock  and  plant  used  or  provided  by  a  company  for 
the  purpose  of  the  traffic  on  the  railway  or  of  the  stations  or 
workshops,  shall  not,  after  the  railway  or  any  part  thereof  is 
open  for  public  traffic,  be  liable  to  be  taken  in  execution  at  law 
or  in  equity  at  any  time  after  the  passing  of  this  Act,  and  before 
the  first  day  of  September,  1868.  .  ." 

It  may  be  noticed  that  the  provision  for  the  protection  of  roll- 
ing stock  was  adopted  for  only  one  year.  This  was  due  to  the 
fact  that  such  a  measure  was  still  regarded  as  an  innovation. 
On  account  of  the  aforesaid  opposition  and  uncertainty  as  to  the 
practicability  of  such  a  measure,  Parliament  decided  to  try  it 
for  twelve  months  so  as  to  carry  the  matter  over  the  next  ses- 
sion; and  then  if  it  were  found  absolutely  necessary  that  there 
should  be  a  sale  of  rolling  stock  by  the  creditors,  it  could  be  so 
arranged  by  an  Act  of  Parliament.79 

This  precaution  proved  beneficial.  It  afforded  time  to  try  out 
the  principle  and  it  also  gave  a  great  stimulus  to  all  concerned 
to  make  close  observation,  with  a  view  to  altering  the  rule  either 
one  way  or  the  other. 

The  result  of  the  application  of  the  provisions  governing  the 
protection  of  rolling  stock  proved  so  advantageous  that  Parlia^ 
ment  in  the  following  year,  by  a  special  general  act,80  extended 

79  Hansard,  sec.  3,  189 :  162. 

so  The  Eailway  Companies  Act,  1868,  31  &  32  V.  c.  79.  This  act  was 
enacted  for  the  sole  purpose  of  extending  the  time-limit  to  1870. 


78  RAILWAY   FINANCE   IN   ENGLAND  [78 

the  time  limit  of  the  provision  to  three  years,  that  is,  until  Sep- 
tember 1,  1870,  and  at  the  end  of  the  three  years,  Parliament 
found  it  expedient  to  pass  another  special  act 81  for  the  purpose 
of  making  the  provision  perpetual. 

A  large  part  of  the  act  was  devoted  to  defining  relations  be- 
tween the  company  and  its  creditors.  In  this  connection,  ample 
provisions  were  made  for  settling  and  defining  the  rights  of 
shareholders  of  the  company  as  among  themselves  for  raising 
money  by  pre-preference  stocks.  Considerable  protection  was 
afforded  the  holders  of  the  different  classes  of  securities  which 
might  be  affected  by  such  schemes,  through  the  requirement  be- 
fore a  plan  could  be  put  into  operation  of  the  consent  of  the 
holders  of  three-fourths  of  each  class  of  such  affected  securities. 
Moreover,  the  scheme  must  first  of  all  be  filed  in  the  Court  of 
Chancery;  and  after  hearing  the  directors,  creditors,  or  other 
parties  whom  the  court  might  deem  entitled  to  be  heard  and  on 
being  satisfied  with  the  nature  of  the  scheme,  the  court  might 
confirm  it.  Notice  concerning  both  the  filing,  as  well  as  the  con- 
firmation, of  the  plan  must  be  published  in  the  gazette.82 

Besides  the  provision  prohibiting  the  seizure  of  the  rolling 
stock,  and  that  for  the  creation  of  pre-preference  stocks,  the 
Railway  Companies  Act  of  1867  contained  a  number  of  other  im- 
portant clauses  governing  the  loan  capital  of  railways.  In  the 
first  place  it  provided  that,  except  the  claim  of  the  rent  charges 
and  lease,  ' '  all  money  borrowed  or  to  be  borrowed  by  a  company 
on  mortgage  or  bond  or  debenture  stock  under  the  provisions  of 
any  Act  authorizing  the  borrowing  thereof  shall  have  priority 
against  the  company  and  the  property  from  time  to  time  of  the 
company  over  all  other  claims  on  account  of  any  debts  incurred 
or  engagements  entered  into  by  them  after  the  passing  of  this 
Act."83  Thus  by  this  clause,  the  holders  of  debenture  stocks 
were  clothed  with  an  indisputable  claim  of  priority  against  the 
company  over  the  holders  of  Lloyd's  bonds  and  other  irregular 
securities.  This  measure  was  without  doubt  urgently  needed  for 
improving  the  desirability  of  railway  debentures. 

Section  26  of  this  act  provided  that  "money  borrowed  by  a 

si  Railway  Companies  Act,  1875,  38  &  39  V.  e.  31. 

82  The  Railway  Companies  Act,  1867,  30  &  31  V.  c.  127,  ss.  6-22. 

ss  30  &  31  V.  c.  127,  p.  23. 


79]  SUPERVISION  OF  RAILWAY  CAPITALIZATION  79 

company  for  the  purpose  of  paying  off,  and  duly  applied  in  pay- 
ing off,  bonds  or  mortgages  of  the  company  given  or  made  under 
the  statutory  powers  of  the  company,  shall  ...  be  deemed 
money  borrowed  within  and  not  in  excess  of  such  statutory 
powers. ' ' 

As  we  have  seen,  the  railways  had  much  trouble  in  meeting 
their  mortgages  falling  due.  It  has  also  been  shown  that  there 
was  much  difficulty  over  the  fact  that  securities  issued  tem- 
porarily in  excess  of  the  borrowing  powers  even  in  anticipation 
of  paying  off  debentures  falling  due  were  sometimes  regarded  as 
illegal.  By  the  above  provision  Parliament  endeavored  to  re- 
move this  difficulty;  and  subsequent  events  have  amply  shown 
that  the  effort  of  Parliament  was  not  in  vain.  That  such  a  pro- 
vision had  been  urgently  needed,  few  men  who  are  familiar  with 
the  financial  affairs  of  English  railways  can  deny. 

To  make  the  debenture  stocks  more  acceptable  and  easier  to 
issue  this  act  also  removed  all  the  restrictions  prescribed  in  the 
Companies  Clauses  Act  of  1863  as  to  the  rate  of  interest.84 
Therefore,  the  companies  and  their  investors  were  empowered  to 
make  whatever  arrangements  they  saw  fit  in  regard  to  the  rate 
of  interest. 

Thus  closed  the  legislation  on  the  loan  capital  of  railways  in 
England.  Based  upon  the  acts  just  referred  to,  the  Lord  Chan- 
cellor in  1869  decided  that  railway  companies  should  be  held 
liable  for  all  loans  irregularly  contracted  and  even  in  excess  of 
its  borrowing  powers,85  thus  removing  much  of  the  temptation  of 
railways  to  borrow  illegally.  Aside  from  the  imposition,86  since 
1868,  of  a  stamp  duty  of  2  per  cent  on  the  nominal  value  of  the 
debenture  stocks  transferred,  nothing  new  has  been  added  to  the 
principles  laid  down  up  to  1870.  In  spite  of  the  temporary  dis- 
content with  these  measures  of  Parliament,  the  regulations  seem 
to  have  proven  on  the  whole  satisfactory.  With  the  additional 
security  and  facility  given  to  railway  debenture  stocks  it  soon 
became  common  for  railways  to  ask  Parliament  for  powers  to 
issue  stocks  to  be  appropriated  solely  to  the  liquidation  and  can- 
cellation of  debentures  and  other  periodical  loans  falling  due.87 

s*  Sec.  25,  30  &  31  V.  c.  127. 
ss  Economist,  August  7,  1869. 

86  Sec.  12,  31  &  32  V.  c.  124. 

87  Eailway  Times,  May  2,  1868. 


80  RAILWAY   FINANCE   IN   ENGLAND  [80 

The  desirability  of  such  stocks  was  well  shown  by  the  fact  that 
by  1876  practically  all  the  loans  were  converted  into  this  class  of 
securities.88 

Our  survey  of  this  aspect  of  English  railway  finance  leads  to 
certain  conclusions,  briefly  expressed  as  follows: 

1.  Other  things  being  equal,  long  period  debts  or  better  still, 
perpetual  and  devisible  debenture  stocks  redeemable  at  the  op- 
tion of  the  company  are  more  desirable  for  railways  than  lump 
sum  loans  or  mortgages  falling  due  after  short  periods. 

2.  The  action  taken  by  the  English  Parliament  in  1867  pro- 
hibiting the  seizure  of  rolling  stock,  revealed  the  advanced  ideas 
of  that  body  and  proved  to  be  an  effective  measure  for  the  estab- 
lishment of  stability  in  railway  finance. 

3.  The  function  of  a  government  in  regulating  the  capitaliza- 
tion of  railways  by  loans  lies  not  so  much  in  the  adoption  of 
many  complicated  restrictions  as  in  the  enforcement  of  a  few 
essential  rules,  with  a  view  of  enabling  the  investor  himself  to 
tell  the  true  financial  condition  of  the  concern  in  which  he  in- 
vests. 


ss  Board  of   Trade,  General  Eeport  on  Railway  Shares,  Loan  Capital, 
etc.,  1876. 


CHAPTER  IV 

CONTROL  OF  THE  BORROWING  POWERS  OF  RAILWAY 

COMPANIES 

In  early  years  borrowing  powers  were  granted  to  railway  com- 
panies for  the  purpose  of  relieving  the  pressure  of  calls  upon 
shareholders  for  new  capital.  There  was  no  idea  then  that  bor- 
rowings should  become  a  permanent  charge  upon  capital.  Par- 
liament and  the  companies  alike  were  of  the  opinion  that  the 
vast  profits  to  be  derived  from  railways  would  speedily  enable 
the  latter  to  pay  off  their  debts  and  in  addition  to  declare  divi- 
dends of  a  much  higher  rate  than  is  now-  expected.  The  general 
belief  was  that  railways  were  to  be  constructed  with  capital 
raised  from  subscriptions,  plus  a  small  proportion  of  loans  for 
temporary  purposes.  It  is  hardly  necessary  to  say  that  these 
illusions  as  to  railway  profits  were  soon  dispelled.  The  idea  of 
being  able  to  pay  off  borrowed  money,  however,  was  retained  for 
many  years,  and  was  not  abandoned  until  the  constant  and  in- 
creasing requirements  for  renewals,  replacements,  and  improve- 
ments had  grown  beyond  all  expected  proportions.1 

With  such  a  conception  of  railway  borrowing  in  mind,  Parlia- 
ment endeavored,  from  the  beginning,  to  limit  the  borrowing 
powers  of  railway  companies  as  well  as  to  lay  down  strict  rules 
governing  their  exercise.  Thus,  in  one  of  the  standing  orders,2 
which  guided  early  railway  legislation,  it  was  provided  that  no 
railway  company  should  be  authorized  to  raise,  by  loan  or  mort- 
gage, a  sum  of  money  larger  than  one-third  of  its  share  capital, 
and  that  until  fifty  per  cent  of  the  share  capital  should  have  been 

1  Eailway  Times,  August  22,  1863. 

2  Standing  Order  No.  84.     Cf.  Eemarks  on  Standing  Orders  by  a  Par- 
liamentary Agent,  London,  1837,  p.  55,  and  Eailway  Times,  April  27,  1844. 
Cf.  also  evidence  before  the  select  committee  on  railways,  House  of  Com- 
mons, 1844,  p.  29. 

81 


82  RAILWAY   FINANCE   IN   ENGLAND  [82 

paid  up,  it  should  not  be  in  the  power  of  the  company  to  raise 
any  money  by  loan  or  mortgage.3 

Thus  from  the  beginning,  two  principles  were  laid  down. 
First,  no  railway  company  should  borrow  more  than  one-third  of 
its  share  capital ;  and  secondly,  no  company  should  borrow  at  all 
until  one-half  of  its  share  capital  had  been  paid  up. 

The  purpose  of  Parliament  in  so  strictly  limiting  the  powers 
of  railway  companies  to  one-third  of  their  share  capital  was  due 
first  to  the  general  belief,  as  already  mentioned,  that  railways 
should  be  built  only  with  their  subscribed  share  capital,  and  sec- 
ond to  the  fact  that  strict  limitation  of  loans  was  deemed  neces- 
sary to  give  the  creditors  of  the  companies  adequate  security. 
The  stipulation  that  50  per  cent  of  the  share  capital  be  paid  up 
before  the  exercising  of  borrowing  powers,  was  adopted  with  the 
hope  that  such  a  requirement  would  tend  to  place  the  shares  in 
the  hands  of  substantial  investors  as  well  as  to  strengthen  the 
security  of  the  debentures. 

It  was  also  held  that  no  sellers  of  land  or  of  material  to  a  rail- 
way company  could  be  prejudiced  by  the  railway  company  issu- 
ing securities  not  authorized  by  the  act  of  incorporation.  The 
company  was  not  entitled  to  call  any  credit  or  to  pledge  any  part 
of  their  property  for  any  other  purpose,  nor  should  the  directors 
make  any  contract  or  sanction  any  engagements  to  pay  money 
until  they  had  clearly  ascertained  that  from  one  or  other  of  the 
two  sources  authorized  by  Parliament  they  had  the  power  of 
fulfilling  them.4 

So  far  so  good.  But  in  practice  these  rules  were  not  always 
observed.  Much  consideration  was  usually  given  to  peculiar 
circumstances.  The  .standing  order  just  referred  to  was  often 
"either  dispensed  with  or  modified  so  as  to  meet  the  circum- 
stances of  the  case. "  5  In  fact  another  standing  order  provided 
for  a  select  committee  on  standing  orders,  whose  duty  it  was  to 

3  As  has  been  referred  to  in  Chapter  I  the  early  railway  acts  were 
modelled  after  the  Canal  Acts,  and  the  latter  in  the  earliest  years  gave  no 
power  for  borrowing.  The  first  acts  in  which  borrowing  powers  appeared 
were  passed  in  1770.  By  degrees  this  power  of  the  Companies  was  re- 
stricted to  one-third  of  their  share  capital.  Report  of  Royal  Commission 
of  Railways,  1867.  If  iii. 

*  Letter  to  the  London  Times,  August  23,  1866. 

5  Eemarks  on  Standing  Order,  pp.  78-79. 


83]  BORROWING  POWERS  OP   RAILWAY   COMPANIES  83 

"determine  whether  the  standing  orders  ought  or  ought  not  to 
be  dispensed  with."6  Moreover,  it  soon  became  clear  that  not 
only  were  the  borrowings  of  railways  to  remain  a  permanent 
charge  instead  of  a  temporary  obligation  as  was  expected,  but 
that  the  limit  of  the  borrowing  powers  was  altogether  too  narrow. 
The  state  of  the  money  market  and  other  circumstances  fre- 
quently made  it  advisable  for  a  railway  company  to  raise  a  larger 
proportion  of  its  capital  by  loans  than  the  law  permitted.  In- 
deed it  was  only  by  over-borrowings  that  some  companies  con- 
tinued to  pay  a  fairly  good  dividend.7 

Under  such  circumstances  one  may  readily  imagine  what  hap- 
pened. When  a  railway  company  wished  to  increase  its  loans, 
especially  when  it  could  declare  bigger  dividends  by  such  a 
process,  it  would  find  some  way  of  so  doing  whether  the  law 
permitted  it  or  not.  Moreover,  the  law  itself  was4  too  imperfect 
to  be  effective,  for  it  only  .stipulated  against  the  borrowing  on 
mortgages  and  bonds,  whereas  there  were  other  ways  by  which 
money  could  be  borrowed.  As  was  currently  remarked  at  the 
time,  one  could  always  drive  a  coach  and  six  through  any  law  if 
he  tried  hard  enough.8  This  was  exactly  what  happened.  Money 
was  borrowed  in  many  ways  in  excess  of  the  legal  limit,  in  spite 
of  the  law.  The  best  known  expedient  for  evading  the  restric- 
tions of  Parliament  was  by  the  issue  of  loan  notes!,  for  which  the 
directors  issuing  them  were  personally  responsible.  By  the  issue 
of  such  loan  notes  the  companies  had  "continually  exceeded 
their  borrowing  powers. ' ' 9  Thus  the  law  prohibiting  railways 
from  borrowing  more  than  one-third  of  their  share  capital  on 
mortgages  or  bonds  was  evaded  although  not  violated  in  letter. 

The  early  restrictive  measures  upon  railway  borrowings 
coupled  with  What  was  done  to  evade  them  had  generally  a 
vicious  effect  upon  the  property  of  the  original  shareholders, 
especially  when  the  company  was  not  prosperous.  In  such  cases,  ' 
the  borrowing  powers  were  usually  exhausted  and  hence  no 
money  could  be  obtained  through  that  channel.  Loan  notes 
might  be  issued,  but  they  were  obligatory  upon  the  directors 

6  Kemarks  on  Standing  Orders,  pp.  13-14. 

7  Eailway  Times,  April  27,  1844. 

8  Evidence  before  Select  Committee  on  Eailway  Borrowing  Powers,  1864, 
p.  22. 

9  Eeport  of  Royal  Commission  on  Railways,  1867,  p.  xxiii. 


84  RAILWAY   FINANCE  IN   ENGLAND  [84 

personally  instead  of  upon  the  company.  The  directors  would 
naturally  become  more  desirous  of  relieving  themselves  of  their 
personal  obligations  according  as  the  conditions  of  the  company 's 
finance  became  more  desperate.  Therefore,  they  would  proceed 
to  Parliament  and  obtain  authority  to  issue  shares  either  at  a 
ruinous  discount,  or  with  an  exorbitant  rate  of  interest  guaran- 
teed upon  them.  The  result  would  be  an  immediate  depreciation 
of  the  value  of  the  old  stocks.  The  property  of  the  original 
shareholders,  who  encountered  the  risk  of  forming  the  com- 
pany, was  often  ruined,  and  the  credit  of  the  concern  would  also 
sink  with  the  value  of  the  old  stocks.  Thus  it  was  claimed  that 
the  standing  order  limiting  the  borrowing  powers  of  railway 
companies  had  a  tendency  either  to  prevent  railways  from  rais- 
ing their  capital  in  the  most  judicious  manner  or  to  compel  them 
to  issue  securities  of  an  irregular  character.10 

Efforts  were  made,  during  the  forties,  to  urge  Parliament  to 
abolish,  or  at  least  to  broaden  the  limit.11  Nothing,  however, 
was  done  to  remedy  the  situation.  The  law  was  neither  modified 
nor  enforced.  Like  many  other  stringent  laws,  it  was  consistent- 
ly disregarded.  In  some  cases,  sums  of  money  larger  than  the 
amount  of  the  total  authorized  share  capital  were  borrowed 
through  loan  notes  or  other  similarly  illegal  instruments.12 

The  worst  effect  was  that  the  public  did  not  understand  clearly 
that  such  loan  notes  were  illegal,  and  were  astonished  when  it 
was  declared  by  the  select  committee  of  the  House  of  Commons, 
1844,13  that  these  loan  notes  were  ' '  absolutely  invalid, ' '  and  that 
the  lenders  had  no  means  whatever  of  enforcing  the  repayment 
of  their  money.  The  issue  of  such  notes  was  not  merely  illegal 
but  actually  a  breach  of  the  original  contract  under  which  the 
act  of  incorporation  was  obtained.  Thus  this  select  committee 
on  railways  felt  it  highly  important  to  adopt  some  means  to  pre- 
vent the  recurrence  of  practices  so  "highly  objectionable.  .  ."  14 

10  Railway  Times,  April  27,  1844. 

11  Ibid. 

12  Beport  of  select  committee  of  the  House  of  Commons  on  Bailways, 
May  24,  1844.     Eailway  Times,  June  22,  1844. 

is  Fifth  Report  of  Select  Committee  of  the  House  of  Commons,  1844. 
Cf.  also  Eailway  Times,  June  22,  1844. 
i*  Ibid. 


85]  BORROWING  POWERS  OF  RAILWAY  COMPANIES  85 

At  the  same  time  it  was  noticed  that  although  the  existing 
transactions  were  illegal  and  contrary  to  the  public  policy,  they 
were,  nevertheless,  of  "a  perfectly  bona  fide  character"  as  be- 
tween the  borrowers  and  the  lenders.  The  contracts  were  en- 
tered into  without  a  distinct  knowledge  of  the  illegality.  More- 
over, the  money  so  raised  was  applied  for  the  execution  of  the 
work  authorized  by  Parliament.  Therefore,  ignorance  of  the 
illegality  of  these  securities  should  be  considered. 

With  these  problems  in  view,  the  select  committee  on  railways 
after  many  sittings  at  which  much  evidence  was  taken,  recom- 
mended the  suppression  of  the  issue  of  such  illegal  securities  in 
the  future.  At  the  same  time,  it  expressed  the  opinion  that  in 
order  to  avoid  undue  hardship  upon  investors  and  the  danger 
of  disturbing  the  existing  bona  fide  engagements,  certain  pro- 
visions ought  to  be  made  by  Parliament  for  the  purpose  of  con- 
verting these  loan  notes  into  valid  securities. 

Following  the  recommendations  of  this  committee,  Parliament 
passed  an  act 15  in  1844  to  the  effect  that  ' '  from  and  after  the 
passing  of  the  Act  any  railway  company  issuing  any  loan  notes 
or  other  negotiable 16  or  assignable  instruments  purporting  to 
bind  the  company  as  a  legal  security  for  money  advanced  .  .  . 
other  than  under  the  powers  of  some  Act  or  Acts  of  Parliament, 
.  .  .  shall  for  every  such  offense ' '  be  liable  to  a  fine  equal  to 
the  sum  for  which  such  loan  notes  purported  to  be  a  security. 
The  companies,  however,  were  permitted  to  renew  their  loan 
notes  issued  prior  to  the  passing  of  the  act  for  any  period  not 
exceeding  five  years  from  the  passing  of  the  act. 

It  was  also  provided  that  companies  should  pay  off  all  their 
notes  issued  or  contracted  to  be  issued  before  July  12,  1844,  as 
the  same  might  fall  due,  and  that  a  register  of  all  such  loan 
notes,  etc.,  should  be  kept  by  the  secretary  of  the  company,  which 
should  be  open,  without  charge,  at  all  reasonable  times  to  the 
inspection  of  persons  interested. 

In  the  Companies  Clauses  Act  of  1845,  considerable  attention 
was  given  to  the  question  of  railway  borrowing  powers.  The 
general  rules  governing  the  borrowing  powers  of  railway  corn- 
is  The  Eegulation  of  Bailways  Act,  1844,  7  &  8  V.  c.  85. 

is  Italics  are  mine. 


86  RAILWAY   FINANCE  IN   ENGLAND  [86 

panics,  laid  down  in  this  first  Clauses  Consolidation  Act,  may 
be  briefly  summed  up  as  follows: 

(1)  Borrowing  powers  must  first  be  obtained  from  Parlia- 
ment. 

(2)  All  borrowings  must  be  executed  according  to  the  pro- 
visions and  regulations   contained  in   the   acts   granting  such 
powers. 

(3)  All  borrowings  must  be  sanctioned  by  an  order  of  a 
general  meeting  of  the  company. 

(4)  In  no  case  must  such  borrowings  exceed  in  the  whole  the 
sum  prescribed  in  the  special  acts  of  Parliament,  which  sum  was 
generally  limited  to  one-third  of  the  share  capital  of  the  com- 
pany. 

(5)  Fifty  per  cent  of  the  aggregate  sum  of  the  share  capital 
must  be  paid  up. 

For  the  enforcement  of  these  rules,  it  was  provided  that  the 
certificate  of  a  justice  of  peace  and  a  copy  of  the  order  of  a  gen- 
eral meeting  should  constitute  sufficient  evidence  of  powers  to 
borrow.  Rules  governing  the  manner  of  transfers  of  such  se- 
curities as  well  as  the  registration  of  the  same  were  prescribed  in 
detail. 

To  strengthen  these  rules,  it  was  further  provided  that  "  at  all 
reasonable  times  the  books  and  accounts  of  the  company  shall  be 
open  to  the  inspection  of  the  mortgagees  and  bondholders.  .  . 
with  liberty  to  take  extracts  therefrom,  without  fee  or  reward." 

Thus  within  two  years,  the  issue  of  loan  notes,  which  was  one 
of  the  most  effective  instruments  for  evading  the  law,  was  placed 
under  severe  penalty,  and  the  general  rules  governing  the  bor- 
rowing powers  of  railways  as  well  as  the  methods  for  their  en- 
forcement were  codified  into  a  general  act.  But  in  both  cases 
loopholes  were  left,  through  which  these  rules  were  practically 
nullified.  In  the  case  of  the  prohibition  against  loan  notes  the 
phraseology  of  the  law  led  some  railways  to  construe,  not  with- 
out reason,  that  the  enactment  applied  only  to  negotiable  securi- 
ties, as  specified  in  the  enactment,  and  not  to  the  mere  borrow- 
ing of  money  on  instruments  not  negotiable.  At  any  rate,  some 
railways  made  this  their  excuse  to  evade  the  restrictions  against 
over-borrowing.  A  new  form  of  notes  was  soon  devised  by  an 
expert  lawyer  which  proved  to  be  of  greater  consequence  than 


87]  BORROWING  POWERS  OF   RAILWAY   COMPANIES  87 

the  earlier  form  of  loan  notes.  In  the  case  of  the  general  law 
restricting  over-borrowing,  the  regulations,  per  se,  were  strict 
enough.  But  the  enforcement  of  these  regulations  was  left  en- 
tirely in  the  hands  t>f  the  country  justices.  Under  the  act,  these 
justices,  with  their  knowledge,  or  rather  lack  of  knowledge,  re- 
garding the  complicated  system  of  railway  finance  and  account- 
ing, were  depended  upon  to  ascertain  whether  or  not  a  railway 
had  fulfilled  the  requirements  of  the  law  governing  its  borrow- 
ings; and  their  findings  were  final. 

Moreover,  in  spite  of  the  general  law,  considerable  irregularity 
appeared  to  have  existed  in  practice.  Thus  in  their  third  re- 
port,17 the  select  committee  on  railways  appointed  by  the  House 
of  Commons  in  1848,  three  years  after  the  first  general  act  was 
passed,  pointed  out  that  some  bills  of  that  session  appeared  "to 
contain  irregular  or  undefined  powers  of  raising  money.  .  ." 
This  committee  also  pointed,  out  that  the  most  objectionable  pro- 
visions were  the  general  powers  for  raising  money  to  pay  off 
debts  of  the  companies,  when  the  bills  contained  no  distinct  re- 
cital of  the  facts  or  specifications  of  the  amount. 

In  spite  of  such  irregularities,  it  may  be  said  that  the  first 
period  of  the  legislation  on  railway  borrowing  powers  was  closed 
by  the  act  of  1845.  With  the  exception  of  the  provision  con- 
tained in  the  Abandonment  of  Railways  Act,  1850,18  providing 
for  the  reduction  of  borrowing  powers  in  proportion  to  the 
amount  of  work  abandoned,  nothing  very  important  was  done 
during  the  following  fifteen  years  to  alter  the  established  rules. 

In  1856  agitation  for  the  more  strict  regulation  of  railway  bor- 
rowing powers  was  revived.  A  prominent  member  of  the  House 
of  Lords  19  endeavored  to  insert  clauses  in  the  railway  bills  seek- 
ing legislation  during  the  session  of  that  year  to  the  effect  that 
no  money  should  be  borrowed  by  a  company  except  on  the  au- 
thority of  a  minute  signed  by  a  majority,  at  least,  of  the  direc- 
tors for  the  time  being  of  the  company,  and  such  minutes  should 
be  published  in  the  London  Gazette  before  any  money  be  raised 
under  the  same;  and  if  any  money  should  be  borrowed  beyond 

IT  General  Report  of  the  Board  of  Trade  on  Bills  of  the  Session,  1863, 
p.  19. 

is  13  &  14  V.  e.  83. 

is  Lord  Eedesdale.     See  Bailway  Times,  April  26,  1856. 


88  RAILWAY   FINANCE  IN   ENGLAND  [88 

the  powers  given  by  this  proposed  act,  the  directors  signing  the 
minute  authorizing  such  borrowing  should  be  personally  liable 
jointly  and  severally  for  the  amount  so  raised  beyond  the  powers. 

The  purport  of  the  provision  was  to  prevent  the  companies 
from  exceeding  their  borrowing  powers,  by  making  the  directors 
personally  liable  for  such  offenses.  This  aroused  much  opposi- 
tion. It  was  feared  that  it  would  alarm  the  public  mind  and 
shake  the  confidence  of  directors  in  their  colleagues.  In  speak- 
ing of  this  provision,  the  Railway  Times  20  editorially  remarked 
that  it  was  "so  fraught  with  evil,  so  redolent  of  injustice,  and 
so  hostile  to  the  whole  moneyed  world  that  deals  or  invests  in 
debenture  securities,  that  it  cannot  be  tolerated. ' ' 

The  required  advertisement  in  the  London  Gazette  was  re- 
garded as  worse  than  useless.  Attention  was  called  to  the  fact 
that  it  was  not  always  prudent  for  a  purchaser,  and  frequently 
less  so  for  a  borrower,  to  announce  that  he  must  obtain  a  certain 
sum  of  money.  These  announcements  in  the  London  Gazette, 
though  they  might  be  overlooked  by  the  mass  of  the  community, 
would  be  keenly  scrutinized  by  the  "sensible"  commission 
agents,  who  had  no  money  of  their  own  but  who  played  a  great 
part  in  keeping  others'  money  in  circulation.  As  soon  as  the  ad- 
vertisement appeared  in  the  Gazette,  it  was  feared  that  "the 
highest  existing  rates  of  interest"  would  be  "uniformly"  ex- 
acted from  the  borrowing  company. 

Moreover,  if  the  directors  were  made  personally  liable,  as  pro- 
vided by  the  clause,  it  would  prevent  good  men  from  taking  up 
seats  in  railway  directorates.  Even  without  any  such  liabilities, 
railway  companies  had  already  found  it  hard  to  find  really 
"good  and  upright  men  to  undertake  the  onerous  but  thankless 
duty  of  directors." 

No  open  opposition  was  made  in  Parliament.  But  the  Parlia- 
mentary committee  in  charge  of  the  matter  unanimously  rejected 
the  clause  even  without  hearing  the  arguments  of  those  who  were 
prepared  to  oppose  it.21 

But  the  question  of  borrowing  powers  of  railways  was  still  a 
live  one.  In  the  Lands  Clauses  Consolidation  Act  of  1860  pro- 

20  Railway   Times,  April   26,   1856,   from  which  the  other  quotations  in 
this  connection  are  taken. 

21  Railway  Times,  May  3,  1856. 


89]  BORROWING  POWERS  OF  RAILWAY  COMPANIES  89 

vision  was  made  to  the  effect  that,  in  case  the  proprietors  of  a 
railway  agreed  for  the  purchase  of  any  land  in  consideration  of 
the  payment  of  a  rent  charge,  annual  feu  duty  or  a  ground 
annual,  the  borrowing  power  of  the  railway  should  be  reduced 
by  an  amount  equal  to  twenty  years'  purchase  of  any  rent 
charge,  feu  duty  or  ground  annual,  for  the  time  being  payable. 
In  the  following  year  the  question  of  the  borrowing  powers  of 
railways  came  up  again.  In  petitioning  for  authority  to  increase 
their  share  capital  for  the  purpose  of  subscribing  to  the  under- 
taking of  another  company,  some  railway  companies  endeavored 
to  extend  their  borrowing  powers  in  proportion  to  such  additions 
of  share  capital.  On  the  surface,  this  extension  of  borrowing 
powers  seemed  permissible,  in  that  the  borrowings  would  be  still 
within  the  limit  of  one-third  of  the  share  capital.  But  upon  ex- 
amination the  Board  of  Trade  concluded  that  any  extension  of 
borrowing  powers  based  upon  the  share  capital  created  for  the 
purpose  of  subscribing  to  the  undertaking  of  another  company 
was  inconsistent  in  principle  with  the  rule  laid  down  by  Parlia- 
ment which  provided  that  "in  the  case  of  a  railway  bill  no  com- 
pany shall  be  authorized  to  raise  by  loan  or  mortgage  a  larger 
sum  than  one-third  of  their  capital." *2  In  order  to  test  the  con- 
sistency of  such  extension  of  borrowing  powers,  it  was  necessary 
to  go  back  to  the  original  object  of  the  rule  just  referred  to. 
This  was  that  the  mortgage  creditors  of  a  railway  company 
might  have  the  security  of  a  definite  undertaking,  on  which  a 
subscribed  capital  was  to  be  paid  up  to  an  amount  not  less  than 
three  times  as  great  as  the  sum  to  be  borrowed.  If  a  company 
were  empowered  to  borrow  on  the  basis  of  an  increase  of  its 
share  capital  to  be  used  for  subscribing  to  the  undertaking  of 
another  company,  the  lender  of  money  so  borrowed  would  not 
derive  any  additional  security  whatever  from  such  creation  of 
new  capital,  for  this  additional  share  capital  would  not  be  laid 
out  in  the  subscribing  company's  undertaking,  on  which  alone 
the  lender  would  have  a  charge,  but  elsewhere.  Thus,  the  spirit 
of  the  rule  of  Parliament  would  be  destroyed.  Moreover,  if  this 
request  of  the  railways  were  granted,  the  additional  share  capital 

22  The  126th  standing  order  of  the  House  of  Commons  and  the  189th 
standing  order  of  the  House  of  Lords.  See  General  Eeport  of  the  Board 
of  Trade  on  Railway  Bills,  1867,  p.  25. 


90  RAILWAY   FINANCE  IN   ENGLAND  [90 

would  be  made  the  basis  by  both  the  subscribing  and  the  receiv- 
ing companies  for  an  extension  of  their  powers.  Accordingly 
the  Board  of  Trade  recommended  that  such  requests  be  not 
granted.23 

About  1855,  as  has  been  shown  in  a  previous  chapter,  deben- 
ture stocks  came  into  vogue  as  a  security  in  place  of  debenture 
bonds,  and  Parliament  took  steps  to  reduce  the  borrowing  powers 
of  the  companies  in  proportion  to  the  amounts  represented  by 
the  debenture  stocks  issued.  In  every  railway  bill  seeking  power 
to  issue  such  stocks,  provisions  were  made  to  the  effect  that  after 
the  issue  of  such  debenture  stocks  or  the  conversion  of  any  mort- 
gages or  bonds  into  such  stocks,  "it  shall  not  be  lawful  for  the 
company  to  issue  mortgages  or  bonds,  or  any  other  securities,  or 
again  to  borrow  the  sum  so  converted/'  and  the  borrowing 
powers  of  the  company  should  be  decreased  by  the  amount  so 
borrowed,  converted  or  raised  by  the  issue  of  debenture  stocks.24 

The  growing  popularity  of  such  debenture  stock  led  the  Board 
of  Trade  to  make  repeated  recommendations,  beginning  about 
1858,  for  the  adoption  of  some  general  regulations  governing  the 
issue  of  debenture  stocks.  Among  other  things,  it  recommended 
(1)  that  the  powers  to  create  such  stocks  should  be  defined;  (2) 
that  money  should  not  be  raised  by  debenture  stocks  in  lieu  of 
borrowing  until  such  money  might  be  raised  by  the  exercise  of 
the  borrowing  powers  of  the  company;  and  (3)  that  to  the  ex- 
tent of  the  nominal  amount  of  the  debenture  stocks  disposed  of, 
the  borrowing  powers  should  be  extinguished.25  Following  these 
recommendations  of  the  Board  of  Trade,  Parliament  inserted  a 
clause  in  the  Companies  Clauses  Act  of  1863  26  to  the  effect  that 
the  '  '  power  of  borrowing  and  re-borrowing  by  the  company  shall, 
to  the  extent  of  the  money  raised  by  the  issue  of  debenture  stock, 
be  extinguished.  "  As  is  seen,  this  was  not  a  new  principle,  but 
an  old  one  embodied  in  a  new  act. 

Thus  we  see  that  prior  to  1863  the  question  of  the  borrowing 
powers  of  railways  was  not  of  any  great  popular  interest,  al- 
though it  had  always  been  considered  of  considerable  importance 
in  railway  legislation.  The  custom  of  limiting  the  borrowing 


24  15  &  14  V.  c.  83. 

25  General  Beport  of  the  Board  of  Trade  on  Railway  Bills,  1861,  p.  24. 

26  26  &  27  V.  c.  118,  Sec.  34. 


91]  BORROWING  POWERS  OP  RAILWAY  COMPANIES  91 

powers  to  one-third  of  the  share  capital  of  railway  companies 
had  been  established.  The  public  had  seldom  thought  of  chang- 
ing the  established  rules.  They  also  imagined  that  the  restric- 
tions laid  down  by  Parliament  were  observed.  With  some  slight 
exceptions,  the  act  of  1845  was  considered  as  sufficient  to  safe- 
guard the  interest  of  the  security-holders.  In  fact  there  was  an 
idea  that  the  recording  of  securities  by  the  secretaries  of  the 
companies  was  a  sufficient  protection  without  an  examination 
into  the  details  of  the  company.  When  the  investor  got  his  de- 
benture, he  never  thought  of  searching  the  company's  books. 
It  would  be  useless;  ''it  was  never  done;  people  trusted  to  its 
being  correct. ' ' 2T 

But  under  this  smooth  surface,  something  unexpected  was 
taking  place.  The  borrowing  powers  of  many  railway  companies 
were  grossly  abused  or  exceeded.  In  the  first  place  a  cry  was 
raised  against  the  restrictions  on  borrowing  powers  to  the  effect 
that  they  were  too  strict  and  that  the  limit  was  too  small.  Com- 
panies were  frequently  in  urgent  need  of  larger  sums  of  bor- 
rowed money  either  to  carry  on  works  or  to  repay  debentures 
falling  due.  This  difficulty  was  encountered  in  the  common  prac- 
tice of  companies  issuing  bonds  to  agents  in  several  of  the  mon- 
eyed circles  in  the  country.  By  so  doing  the  company  would 
often  suddenly  discover  itself  to  have  borrowed,  through  its 
various  brokers,  a  larger  sum  than  was  permitted  to  it.  Then 
whatever  securities  were  issued  over  and  above  the  limit  were 
illegal.  Such  illegal  issues,  however,  were  not  practically  very 
objectionable,  and  Parliament  often  recognized  such  over-issues 
in  spite  of  their  illegality.28 

But  intentional  breaches  of  the  borrowing  powers  were  also 
made.  Some  of  the  companies  which  were  the  least  entitled  to 
exercise  such  power  were  the  most  eager  to  exercise  it.  To  get 
around  the  restrictions,  they  resorted  to  fictitious  subscriptions 
and  other  improper  methods.  They  filled  their  subscription 
lists  with  the  names  of  "men  of  straw,"  and  they  nominally  ful- 
filled the  requirement  of  having  one-half  of  their  share  capital 
paid  up  not  with  payments,  however,  made  by  bona  fide  sub- 
scribers, as  contemplated  by  Parliament,  but  through  the  agency 

27  Evidence  before  select  committee  on  borrowing  powers  of  railway  com- 
panies, 1864,  pp.  6-10. 

28  Railway  Times,  September  12,  1863. 


92  RAILWAY   FINANCE  IN   ENGLAND  [92 

of  contractors'  contributions  or  advances  made  by  financial 
agents.  As  soon  as  the  requirements  of  law  were  in  some  such 
way  complied  with,  they  would  immediately  have  recourse  to 
their  borrowing  powers.  In  many  cases,  the  line  was  construct- 
ed almost  entirely  with  borrowed  money,  without  any  funds  be- 
ing left  for  the  equipment  or  working  of  the  road.  Then  the 
promoters  would  go  to  Parliament  to  ask  for  powers  to  cancel 
their  ordinary  shares  which  had  been  created  but  not  disposed 
of  and  to  issue,  instead,  preference  and  other  shares  with  claims 
prior  to  those  of  the  ordinary  shareholders.29 

Fraudulent  breaches  of  the  law  were  also  quite  common.  As 
in  the  case  of  the  West  Hartlepool  Harbor  and  Railway,  it  was 
discovered  after  a  protracted  inquiry  by  a  select  committee  that 
vast  frauds  had  been  committed.  The  company  under  its  three 
separate  acts  of  Parliament  was  authorized  to  raise  £2,100,000 
with  power  to  borrow  to  the  extent  of  one-third  of  the  sum  paid 
up  for  shares.  Thus,  even  if  the  whole  share  capital  had  been 
paid  up,  which  was  not  the  case,  the  amount  the  company  would 
have  been  empowered  to  borrow  was  £525,000.  But  the  com- 
pany actually  borrowed  £2,700,000,  without  any  authority  from 
Parliament.30 

The  discovery  of  this  fraud  discredited  railway  debentures 
more  widely  than  did  even  the  panic  of  1847.  The  mind  of  the 
public  was  appalled  when  it  was  shown  that  all  this  fraud  was 
done  in  spite  of  the  "duly  authorized,  properly  circulated"  half- 
yearly  accounts  and  in  spite  of  the  service  of  the  ' '  Committee  of 
Assistance"  who  helped  to  keep  the  company's  affairs  straight. 
The  debenture-holders  felt  that  they  possessed  no  security  either 
in  the  acts  of  Parliament  or  in  the  returns  of  the  Board  of 
Trade,  and  much  less  in  the  half-yearly  accounts  of  the  com- 
panies. In  spite  of  all  the  restrictions  and  protection  which 
Parliament  appeared  to  have  given,  he  might  be  robbed  of  his 
money  at  any  time.31 

It  was,  however,  not  the  mere  breaking  of  the  law,  but  the 
effect  of  such  breaches  upon  the  investors,  that  proved  especially 
obnoxious.  When  a  company  over-issued  securities  contrary  to 

29  Railway  Times,  May  2,  1868. 

so  Hansard,  171:   1302-1303. 

a  Economist,  June  22,  1863,  pp.  674-675. 


93]  BORROWING  POWERS  OF  RAILWAY  COMPANIES  93 

law,  much  hardship  must  necessarily  fall  upon  somebody.  The 
securities  issued  over  and  above  the  borrowing  powers  were  il- 
legal, and  hence  the  holders  of  such  securities  had  no  status  be- 
fore the  law.  If  the  principal  and  interest  were  paid  to  the 
holders  of  such  illegal  securities,  the  money  must  come  from 
somewhere.  If  they  were  not  paid,  they  would  be  losers.  The 
holders  of  the  legal  securities  would  justly  oppose  the  reduction 
of  their  interest  to  pay  the  holders  of  illegal  debentures.  They 
advanced  their  money  upon  legal  security  and  they  would  object 
to  anyone  else  receiving  one  farthing  until  their  claims  were 
satisfied.  These  holders  of  legal  securities,  who  had  no  share  in 
the  management  of  the  company,  certainly  should  not  be  made 
to  suffer  by  the  misconduct  of  persons  over  whom  they  had  no 
control.  Nor  should  they  in  equity  suffer  simply  because  other 
people  had  lost  money  upon  purchasing  illegal  securities. 

Then  it  was  urged  that  the  holders  of  the  excessive  debentures 
who  advanced  their  money  without  any  legal  security  should 
stand  the  loss.  At  first  sight  this  appeared  permissible.  But 
the  true  state  of  affairs  showed  that  this  was  too  harsh  a  measure. 
It  was  true  that  these  holders  of  excessive  debentures  had  no 
legal  claim  to  depend  upon;  but  it  was  also  true  that  this  was 
not  entirely  their  fault.  Their  money  was  advanced  in  a  bona 
fide  manner.  The  company  had  received  their  money  into  its 
hands  and  had  either  spent  it  on  its  authorized  works,  or  still 
retained  it  in  its  treasury.  Moreover,  it  was  likely  that  neither 
the  shareholders  nor  the  holders  of  legal  securities  could  have 
derived  their  income  were  it  not  for  the  money  advanced  by  the 
holders  of  such  illegal  securities. 

Finally  it  appeared  that  the  shareholders,  who  in  law  had  the 
power  to  appoint  directors  and  the  managers  of  the  business  and 
whose  employees  issued  such  illegal  debentures,  should  be  made 
responsible.  But  there  were  also  many  practical  objections  to 
this  course  of  procedure.  In  the  first  place,  it  was  pointed  out 
that  these  shareholders  bought  their  stocks  on  the  express  as- 
surance embodied  in  the  acts  of  Parliament  that  there  should  be 
only  a  certain  amount  of  fixed  charges  against  the  company  with 
a  prior  claim  over  their  dividends.  Although  theoretically  they 
had  the  power  of  appointing  the  managers  and  directors,  many 
of  them,  in  reality,  were  no  more  responsible  for  the  conduct  of 


94  RAILWAY   FINANCE   IN   ENGLAND  [94 

their  so-called  employees  than  the  other  classes  of  investors. 
They  had  more  enterprising  spirit  in  investing  their  money  in 
the  stocks  of  the  railway,  but  they  certainly  should  not  be  pun- 
ished for  that  enterprising  spirit  which  was  much  needed. 

All  these  and  many  other  difficulties  as  shown  elsewhere  in  our 
study  were  direct  results  of  the  evasion  and  overriding  of  the 
borrowing  powers  which  Parliament  had  taken  special  and  con- 
stant care  to  prescribe. 

As  mentioned  previously,  the  issue  of  loan  notes  or  other  ne- 
gotiable or  assignable  instruments  purporting  to  bind  the  com- 
pany as  security  for  money  advanced,  was,  since  1845,  prohib- 
ited. Owing  to  the  narrowness  of  the  limit  of  borrowing  powers 
and  some  less  laudable  reasons,  some  companies  soon  discovered 
an  ingenious  way  to  get  around  this  restriction.  They  devised 
the  well  known  device  of  Lloyd 's  bonds  to  bridge  over  the  barrier 
against  loan  notes.  These  instruments  were  issued  neither  as 
negotiable  securities  nor  for  "cash-advances,"  but  as  acknowl- 
edgments of  obligations  for  work  done,  materials  supplied,  or 
for  debts  contracted  in  excess  of  their  borrowing  powers. 

The  original  purpose  for  which  these  bonds  were  devised  was, 
however,  not  altogether  bad,  and  the  circumstances  under  which 
they  were  supposed  to  be  used  also  appeared  to  justify  their  ex- 
istence. As  often  happened,  a  railway  company  suddenly  dis- 
covered that  its  expenditures  were  underestimated  or  its  re- 
sources overestimated.  In  either  case  the  directors  were  in  dif- 
ficulty. They  were  compelled  under  severe  penalty  to  complete 
their  work  within  a  definite  time.32  Their  funds  were  exhaust- 
ed. The  contractor  would  refuse  to  continue  the  work  without 
pay,  and  the  directors  had  no  money  to  pay  him.  Moreover,  if 
the  work  was  left  to  stand  still,  not  only  the  capital  already 
spent  would  remain  unproductive  and  the  work  itself  deteriorate, 
but  the  contractor  would  sue.  Naturally  a  question  would  arise 

s2  In  each  Railway  Act  there  is  always  a  clause  stipulating  the  time 
when  the  line  must  be  completed  and  the  penalty  for  failure.  Clause  34 
of  the  Model  Bills  of  the  House  of  Lords,  1909,  says  that  ' '  if  the  railway 
is  not  completed  within  five  years  from  the  passing  of  this  Act,  then  on 
the  expiration  of  that  period  the  powers  by  this  act  for  making  and  com- 
pleting the  railway  or  otherwise  in  relation  thereto  shall  cease  except  as 
to  so  much  thereof  as  is  then  completed,"  and  clause  35  provides  that  de- 
posit money  shall  not  be  repaid  except  so  far  as  railway  is  opened. 


95]  BORROWING  POWERS  OF   RAILWAY   COMPANIES  95 

as  to  what  should  be  done.  As  the  law  did  not  prohibit  railway 
companies  from  securing  their  debts  contracted  for  the  execu- 
tion of  the  bona  fide  purpose  of  their  undertaking,  the  directors 
would,  therefore,  make  some  sort  of  an  arrangement  with  the 
contractor  by  which  they  would  furnish  him  from  time  to  time 
with  acknowledgments  of  indebtedness,  under  seal  of  the  com- 
pany, for  the  amount  due  to  him  on  account  of  work  done.  On 
these  evidences  of  credit  the  contractor  could  secure  money.  In 
this  way  Lloyd's  bonds  were  issued  to  give  time  to  the  debtor 
company  instead  of  pressing  it  to  issue  shares  and  debentures 
at  great  sacrifice. 

This  was  the  way  in  which  Lloyd's  bonds  were  originated  and 
in  many  instances  used  to  the  advantage  of  railways  and  the 
public;  and  they  appeared  quite  desirable.  No  tenable  argu- 
ment seemed  to  have  been  advanced  to  show  that  a  railway  com- 
pany should  not  issue  to  its  contractors  acknowledgments  of 
indebtedness  for  the  amounts  actually  due  them  on  account  of 
work  actually  executed.  Indeed,  it  was  claimed  that  "if  re- 
stricted to  their  proper  purpose,  Lloyd's  bonds  would  have  been 
a  useful  and  certainly  not  inconvenient  invention. ' ' 33  But  these 
bonds  were  soon  issued  for  different  purposes.  Speculative  un- 
dertakings were  gotten  up  with  hardly  any  hope  of  securing 
money  through  subscription ;  and  these  bonds  were  issued  at ' '  an 
enormous  sacrifice"  in  order  to  get  the  undertaking  completed. 
Ultimately  debentures  had  to  be  issued.  The  result  of  such  a 
procedure  was  a  great  extra  cost  to  the  shareholders  and  the 
owners  of  the  property  in  general.34  Swindling  schemes  were 
also  floated  through  the  instrumentality  of  these  bonds  to  coerce 
some  existing  companies  to  purchase  or  lease  at  outrageous 
prices.35 

Moreover  the  employment  of  the  device  tended  to  deceive  the 
investing  public.  With  the  current  conception  that  the  borrow- 
ing powers  of  railways  were  strictly  limited,  investors  were  se- 
duced into  a  belief  that  the  work  was  so  far  completed  with 
money  raised  in  accordance  with  the  requirements  of  the  acts  of 

33  Railway  Times,  December  15,  1866. 

3*  Evidence  before  Select  Committee  on  Bailway  Borrowing  Powers,  1864, 
p.  35. 

35  Ibid.,  p.  19. 


96  RAILWAY   FINANCE   IN   ENGLAND  [96 

Parliament;  while  in  reality  their  later  investments  instead  of 
being  applied  to  further  prosecution  of  the  work,  had  to  be 
diverted  to  the  payment  of  debts  of  which  the.se  new  subscribers 
(the  only  subscribers,  for  that  matter)  were  ignorant.36 

On  the  other  hand  it  was  contended  that  the  complaint  against 
Lloyd 's  bonds  that  they  represented  a  violation  of  the  borrowing 
powers  of  the  company,  was  unfounded.  These  bonds  could  be 
a  violation  of  the  borrowing  powers  only  when  they  were  issued 
in  excess  of  the  borrowing  powers  of  the  company;  but  it  was 
only  occasionally  that  they  were  issued  in  excess  of  such  borrow- 
ing powers.37  But  this  argument  neglected  the  fact  that  railway 
companies  could  violate  the  law  without  exceeding  the  limit  of 
their  borrowing  powers.  The  companies  were  authorized  to  raise 
so  much  money  on  shares  and  so  much  on  loans.  The  latter 
privilege  was  not  to  be  resorted  to  until  the  whole  of  the  former 
had  been  subscribed  and  one-half  of  its  total  amount  paid  up. 
Some  companies,  however,  whose  undertakings  were  of  such  an 
unpromising  character  that  they  could  neither  secure  subscrip- 
tions nor  make  calls,  and  whose  borrowing  powers  consequently 
did  not  materialize  legally,  would  evade  the  law  by  resorting  to 
Lloyd's  bonds.38  Although  the  amount  raised  was  not  in  excess 
of  the  borrowing  powers,  the  issue  of  such  bonds  was  illegal 
nevertheless. 

Moreover,  as  is  usually  the  case  with  such  convenient  and  yet 
illusive  schemes,  these  Lloyd  bonds  soon  lost  their  original  iden- 
tity. In  fact  by  1864,  the  original  purpose  and  the  proper 
function  of  these  bonds  were  practically  forgotten.  Instead  of 
issuing  them  to  contractors1  for  work  done  in  order  to  relieve 
temporary  pressure,  companies  used  them  in  coupon  form  for 
raising  money 39  and  also  put  them  into  circulation  as  negotiable 
securities.40  Some  directors  incurred  heavy  obligations  by  the 
issue  of  these  bonds  even  without  consulting  the  shareholders  and 
without  the  knowledge  of  the  holders  of  statutory  debentures.41 

se  Railway  Times,  December  15,  1866. 

37  Daily  News,  January  18,  1864,  quoted  by  Railway  Times,  January  23, 
1864. 

38  Railway  Times,  January  23,  1864. 

39  Evidence  before  Select  Committee  of  1864,  p.  31. 

40  Hansard,   182 :  183. 

41  Report  of  Royal  Commission  on  Railways,  1867,  p.  xxiii. 


97]  BORROWING  POWERS  OP   RAILWAY   COMPANIES  97 

Indeed,  within  a  few  years  after  their  first  use  Lloyd  bonds 
became  quite  extensively  circulated,  and  represented  several 
million  pounds  in  nominal  value.  In  some  cases  they  were  even 
regarded  as  statutory  securities.42  Thus  their  extensive  appli- 
cation, and  the  purposes  to  which  they  were  applied,  led  the 
Railway  Times  to  say  that  "no  other  name  than  fraud  can  be 
given  to  transactions  of  this  description,  and  the  eminent  legal 
ability  which  has  been  exercised  in  drawing  up  the  instrument 
so  as  to  keep  it  out  of  the  range  of  criminality  must  accept  its 
share  of  discredit.  .  . "  43  These  instruments  ' '  might  or  might 
not  be  within  the  strict  limit  of  legality,"  stated  a  member  of 
Parliament,44  "but  they  certainly  had  a  tendency  to  be  made  a 
most  fruitful  means  of  deception  and  concealment  of  the  real 
position  of  the  company's  affairs." 

The  effect  of  this  expedient  was  the  total  evasion  of  the  statu- 
tory limitations  of  borrowing  powers.  While  the  legal  borrow- 
ings were  limited  to  only  one-third  of  the  share  capital,  the  il- 
legal borrowings  by  Lloyd  bonds  were  subjected  to  no  limitation 
whatever.  Thus  the  precaution  of  the  legislature  for  the  protec- 
tion of  the  holders  of  statutory  securities  was  nullified.  This 
coupled  with  the  numerous  and  varied  excuses  offered  by  the 
companies  for  exceeding  their  borrowing  powers  in  other  ways 
resulted  in  much  confusion  of  the  whole  situation.45  The  in- 
vestor had  no  means  of  ascertaining  whether  or  not  the  borrow- 
ing powers  of  a  company  had  been  exceeded,  and  consequently 
whether  or  not  the  securities  offered  by  that  company  were 
worthless.  They  had  to  trust  the  railway  returns  made  by  the 
companies  to  the  Board  of  Trade,  but  they  had  no  means  where- 
by to  verify  the  accuracy  of  these  returns.46  If  these  returns 
were  made  with  strictness,  they  might  in  themselves  form  a  good 
prevention  against  over-issue  of  securities,  or  at  least  give 
some  valuable  information.  But  these  returns,  besides  not  be- 
ing always  accurate,  were  not  made  until  the  end  of  each  year 
and  were  not  published  by  the  Board  of  Trade  until  August  or 
September  of  the  year  following.  In  the  meantime  the  public 

42  Evidence  before  Select  Committee  of  1864,  p.  127. 

43  Bailway  Times,  June  25,  1864. 

44  Marquess  of  Clanricarde  in  the  House  of  Lords,  Hansard,  190:  1972. 

45  Hansard,   181:  338. 

46  Bailway  Times,  September  12,  1863. 


98  RAILWAY   FINANCE  IN   ENGLAND  [98 

had  to  depend  upon  such  "miserable  and  imperfect"  extracts 
therefrom  as  were  given  in  the  daily  papers.47  Moreover,  the 
acts  of  Parliament  were  sometimes  in  such  a  state  of  confusion 
that  some  of  the  railway  companies  themselves  did  not  know 
what  their  borrowing  powers  were.48  Thus  the  position  of  the 
debenture-holders  became  exceedingly  unsatisfactory.  By  the 
kind  of  false  shield  which  had  been  thrown  over  the  debentures 
through  the  limitation  of  borrowing  powers,  the  public  was  led 
to  believe  that  the  debenture-holders  had  a  protection  which  they 
really  never  had.49 

Being  faced  by  such  a  serious  situation,  some  people  advocated 
that  borrowing  powers  should  be  abolished  altogether.  They 
argued  that  "this  Gordian  knot,  respecting  which  so  much 
trouble  is  taken  to  render  it  difficult  to  unloose,  could  be  cut  in 
an  instant.  Abolish  borrowing  powers  for  the  future,  except  in 
so  far  as  advances  may  be  made  on  calls.  Let  no  company  .  .  . 
raise  capital  by  any  other  means  than  subscription  for  shares. 
Let  existing  bonds  be  converted  into  debenture  stock,  and  the 
whole  difficulty  will  be  found  to  have  'vanished  like  a  guilty 
thing  away.'  "50 

Certain  members  of  Parliament  seemed  to  be  alive  to  the 
serious  nature  of  the  situation.  A  resolution  was  introduced  in 
Parliament  to  the  effect  that  the  issue  of  securities  should  be 
taken  away  from  the  directors  appointed  by  the  shareholders  and 
placed  in  the  hands  of  persons  representing  the  creditors.  The 
extreme  character  of  this  resolution  reveals  to  a  certain  extent 
the  anxiety  with  which  people  searched  for  remedies.  But  it  was 
regarded  as  being  of  too  novel  a  character  and  was  withdrawn.51 

Parliament,  however,  felt  obliged  to  take  some  steps.  As  most 
legislative  bodies  would  have  done  under  such  circumstances, 
the  House  of  Lords  appointed  a  select  committee  in  1863  "to  in- 
quire into  the  whole  situation  and  report  as  to  what  legislative 
measures  are  desirable  for  the  purpose  of  restraining  the  direc- 

47  Railway   Times,   September  26,   1863.      Evidence  before   Select  Com- 
mittee on  Borrowing  Powers  of  Railways,  1863. 

48  Evidence  before  Lords'  committee  of  1863.     Cf.  Railway  Times,  Sep- 
tember 26,  1863. 

49  Evidence  before  Lords'  Committee  of  1864,  p.  33. 
so  Railway  Times,  September  12,  1863. 

si  Railway  Times,  August  22,  1863. 


99]  BORROWING  POWERS  OF   RAILWAY   COMPANIES  99 

tors  of  railway  companies  from  exceeding  the  limits  of  the  bor- 
rowing powers  fixed  by  the  Act  of  Parliament. ' ' 52  The  com- 
mittee made  two  reports,  in  which  some  methods  for  the  enforce- 
ment of  the  rules  governing  borrowing  powers  were  recommend- 
ed.53 In  the  same  year  when  the  Companies  Clauses  Bill  was 
considered  in  committee,  a  member  in  the  House  of  Commons 64 
moved  the  addition  of  a  clause  requiring  companies  possessing 
borrowing  powers  to  make  an  annual  return  to  Parliament  of 
the  capital  which  they  had  raised,  with  the  object  of  preventing 
the  recurrence  of  cases  like  that  of  the  West  Hartlepool  Com- 
pany 55  or  any  similar  violation  of  the  provision  forbidding  com- 
panies from  raising  money  on  debentures  or  mortgage  until  one- 
half  of  their  share  capital  was  paid  up.  The  clause,  however, 
was  rejected  for  technical  reasons. 

But  the  alarm  which  resulted  from  the  general  lack  of  in- 
formation regarding  the  condition  of  the  borrowing  powers  of 
railway  companies  continued.  Therefore  in  1864  the  House  of 
Lords  felt  it  expedient  to  appoint  another  select  committee  to 
continue  the  inquiry  commenced  in  the  previous  session.  The 
purpose  of  appointing  this  committee  as  well  as  that  of  appoint- 
ing the  previous  one  was  to  devise  some  means  whereby  directors 
might  be  restrained  from  exceeding  the  limits  of  their  fixed  bor- 
rowing powers.  Parliament  appeared  to  believe  that  there  was 
no  question  as  to  the  merits  of  the  established  rules  limiting  the 
borrowing  powers  of  railway  companies.  The  only  thing  needed 
was  to  find  some  efficient  way  of  enforcing  these  rules.  There- 
fore, Parliament  reasserted  its  intention  of  restricting  such  bor- 
rowing powers  through  the  Railway  Construction  Facilities  Act 
of  1864 58  in  which  provisions  were  made  whereby  every  com- 
pany which  wished  to  borrow  money  was  subjected  to  the  follow- 
ing restrictions: 

(1)  "They  shall  not  exercise  the  said  powers  of  borrowing  any  money 
until  the  whole  of  the  share  capital  authorized  by  the  certificate  is  sub- 
scribed for  or  taken,  and  until  one-half  thereof  is  actually  paid  up,  and 

52  Hansard,  181 :  385-386. 

63  For  the  recommendations  of  this  committee,  cf.  infra,  Chap.  V. 
5*  M.  D.  Hassard.     Cf.  Hansard,  172 :  .935-936. 

55  See  Appendix  to  Report  of  Select  Committee  on  Eailway  Borrowing 
Powers,  1864,  and  Hansard,  171:  1302-1303.     Cf.  also  supra,  p.  92. 
se  27  &  28  V.  c.  121. 


100  RAILWAY    FINANCE   IN   ENGLAND  [100 

until  they  prove  to  the  justice  who  is  to  certify  under  section  40  of  the 
Companies  Clauses  Consolidation  Act,  1845,  .  .  .  before  he  so  certifies, 
that  shares  for  the  whole  of  the  capital  are  issued  and  accepted,  and  that 
not  less  than  one-fifth  part  of  the  amount  of  each  separate  share  has  been 
paid  up  on  account  thereof  before  or  at  the  time  of  the  issue  or  acceptance 
thereof,  and  that  all  such  shares  were  taken  in  good  faith,  and  are  held 
by  the  subscribers  or  their  assigns  who  are  legally  liable  for  the  same. ' ' 

(2)  "They  shall  not  borrow  a  larger  sum  in  the  whole  than  one- third 
of  the  amount  of  the  share  capital  authorized  by  the  certificate." 

The  latter  part  of  the  first  clause  was  especially  important,  in 
that  it  required  not  only  all  shares  should  be  taken  in  good  faith 
but  not  less  than  one-fifth  of  the  amount  of  each  separate  share 
had  to  be  paid  up  before  a  company  could  resort  to  its  borrow- 
ing powers.  This  provision  put  a  strong  check  against  the  prac- 
tice of  inducing  "men  of  straw"  to  sign  up  subscriptions  and 
using  borrowed  money  to  meet  the  requirement  of  paying  up 
one-third  of  the  share  capital.  It  has  proven  so  useful  that  pro- 
visions similar  to  it  have  been  invariably  inserted  in  railway 
acts  since.57 

This  closed  the  legislative  measures  concerning  the  borrowing 
powers  of  railway  companies.  As  has  been  shown,  Parliament 
held  from  the  beginning  to  the  idea  of  limiting  the  borrowings 
of  railways  to  one-third  of  their  share  capital,  and  has  consistent- 
ly adhered  to  this  principle  throughout.  Whenever  the  question 
of  borrowing  powers  came  to  its  notice,  all  it  endeavored  to  do 
was  to  adopt  measures  to  meet  the  changed  circumstances  with 
the  purpose  of  maintaining  the  borrowing  limit.  Parliament  ap- 
peared to  believe  that  the  merits  and  necessity  of  limiting  rail- 
way borrowings  to  one-third  of  the  share  capital  had  passed  be- 
yond the  stage  of  argument.  All  that  was  needed  was  to  see 
that  the  limit  was  not  exceeded.  The  idea  of  inquiring  into  the 
adequacy  of  this  limit  itself  did  not  seem  to  have  been  enter- 
tained. Nor  did  Parliament  appear  especially  desirous  to  find 
out  what  were  the  causes  which  led  railway  directors  to  exceed 
their  borrowing  powers.  Even  the  fact  that  the  established  cus- 
tom of  borrowing  on  other  good  securities  invariably  warranted 
a  larger  proportion  of  loans  than  one-third  of  the  share  capital 
failed  to  induce  Parliament  to  inquire  into  the  advisability  of 
modifying  such  restrictions. 

57  Cf.  Clause  7  of  the  Model  Bill  of  the  House  of  Lords,  1909. 


101] 


BORROWING  POWERS  OF   RAILWAY   COMPANIES 


101 


The  legal  limit  of  the  borrowing  powers  was  thus  quite  defi- 
nite. In  practice,  however,  considerable  latitude  seems  to  have 
been  given  to  the  companies  as  shown  by  the  following  table : 


PROPORTION  OF  BORROWINGS  TO  TOTAL  PAID-UP  CAPITAL 


Name  of  Company 

1860 

1870 

1880 

1885 

1890 

1895 

1900 

1907 

% 

% 

% 

% 

% 

% 

% 

% 

Great  Eastern  

33 

32 

31 

32 

31 

32 

33 

Great    Northern  

15 

23 

24 

25 

22 

26 

25 

?5 

Great   Western  

28 

35 

25 

24 

24 

24 

25 

ft4 

London,  Chatham  and  Dover  
London  and  North-Western  

20 

?,7 

29 

28 

29 
?,(\ 

29 
26 

30 

27 

30 
3ft 

31 

3ft 

3fl 

Mersey    

0 

22 

40 

40 

41 

44 

Metropolitan    

24 

29 

27 

29 

27 

26 

?A 

Midland    

19 

22 

fl3 

fll 

29 

28 

ftl 

?,?, 

North    Eastern  

28 

25 

24 

24 

24 

26 

31 

30 

These  railways  were  picked  at  random,  with  some  reference  to 
their  location.  The  percentages  were  calculated  from  the  figures 
given  in  the  Board  of  Trade  returns.  It  is  clearly  seen, that 
some  of  these  railways  considerably  exceeded  the  limits  of  their 
borrowing  powers.  While  the  legal  limit  was  33  per  cent  of  the 
shares  and  25  per  cent  of  the  total  paid  up  capital,  some  of  the 
companies  for  a  number  of  years  borrowed  to  the  extent  of  30 
per  cent  or  more  of  the  latter  capital.  The  Mersey  for  a  number 
of  years  even  borrowed  to  the  extent  of  more  than  40  per  cent 
of  the  total  capital.  There  were  other  railways  which  did  like- 
wise. The  writer  does  not  pretend  to  say  that  such  ''excessive" 
borrowings  were  bad  in  themselves,  nor  does  he  maintain  that 
Parliament  should  not  have  given  some  latitude  to  the  enforce- 
ment of  its  rules;  but  his  study  of  the  contemporary  opinion 
leads  him  to  feel  that  much  difficulty  arises  from  the  loose  en- 
forcement of  strict  rules. 

If  the  whole  railway  system  of  the  kingdom  is  taken  into  con- 
sideration, similar  irregularities  seem  to  have  existed.  Thus, 
in  1860  the  loans  equaled  23  per  cent,  in  1870  they  equaled  27 


102  RAILWAY   FINANCE   IN   ENGLAND  [102 

per  cent,  in  1880,  25  per  cent,  in  1890,  26  per  cent,  in  1900,  28 
per  cent,  and  in  1907,  27  per  cent  of  the  total  paid  up  capital. 

So  far  as  the  writer  has  been  able  to  discover,  the  strenuous 
adhesion  of  Parliament  to  the  idea  of  limiting  the  borrowing 
powers  of  railway  companies  to  one-third  of  their  share  capital 
arose  simply  out  of  the  desire  of  giving  security,  by  that  means, 
to  the  holders  of  legal  debentures.  Yet  if  railways  had  been 
permitted  to  borrow  to  the  extent  of  one-half  or  even  two-thirds 
of  the  bona  fide  share  capital  it  seems  hardly  likely  that  thereby 
the  debenture  holders  would  have  been  deprived  of  a  reasonable 
security.  It  hardly  admits  any  doubt  that  it  is  desirable  for  a 
government  to  limit  the  facilities  for  constructing  railways  with 
other  people's  money;  yet  too  stringent  regulations  are  liable 
to  be  as  harmful  as  the  lack  of  regulation.58  English  experience 
seems  to  justify  the  statement  that  broad  but  vigorously  en- 
forced restrictions  may  prove  more  beneficial  than  narrow  but 
loosely  enforced  limitations. 

Another  fact  which  calls  for  attention  is  that  one  of  the  chief 
difficulties  which  English  railways  and  the  investing  public  had 
in  regard  to  the  question  of  borrowing  powers,  was  the  lack  of 
true  information  concerning  the  real  condition  of  such  powers 
and  the  actual  state  of  affairs  of  the  companies.  Half  the  time, 
neither  the  public  nor  the  companies  knew  what  actual  powers 
existed.  These  facts  lead  to  the  opinion  that  if  more  efforts 
were  made  to  clarify  railway  affairs  in  general  and  railway 
borrowing  powers  in  particular,  much  difficulty  might  have  been 
avoided  and  better  results  obtained. 


Cf.  Hadley,  Eailroad  Transportation,  1903,  p.  54. 


CHAPTER  V 
REGISTRATION   OP  RAILWAY  SECURITIES 

From  the  two  preceding  chapters  it  is  clear  that  from  the 
beginning  of  railway  enterprise,  Parliament  intended  to  give 
ample  protection  to  the  holders  of  legal  securities,  and  that  for 
the  purpose  of  affording  such  protection  it  endeavored  to  re- 
strict the  borrowing  powers  of  railway  companies.  It  is  the 
purpose  of  this  chapter  to  elucidate  the  principal  methods  by 
which  Parliament  tried  to  restrict  such  borrowing  powers. 

In  the  early  acts,  by  which  railway  companies  were  incor- 
porated or  enabled  to  raise  money  on  mortgages  or  bonds,  pro- 
visions were  made  to  the  effect  that  an  entry  or  memorial  of  all 
mortgages  or  assignments  should  be  made  in  the  registers  of  the 
companies  within  fourteen  days  from  the  time  when  the  as- 
signment or  mortgage  was  made,  and  that  such  registers  should 
be  open  to  the  inspection  of  the  proprietors  or  other  interested 
persons  at  all  reasonable  times  without  charge.1  Provisions 
were  also  made  requiring  the  registration  of  the  transfers  of 
such  securities  in  the  companies'  registers  within  twenty -one  days 
of  the  execution  of  that  transfer.  It  was  only  after  such  regis- 
tration that  the  assignee  might  be  entitled  to  the  full  benefits 
and  payments  of  the  securities  transferred.2  Clauses  to  the 
above  effect  were  inserted  in  the  private  railway  acts  during 

1  Section  cxix  of  the  London  &  Croydon  Eailway  Act,  1837,  provided 
that  "An  entry  or  memorial  of  such  mortgage  or  assignment,   containing 
the  numbers  and  dates  thereof,  and  the  names  of  the  parties,  with  their 
proper  additions,  to  whom  the  same  shall  have  been  made,  and  of  the  sums 
borrowed,  together  with  the  rate  of  interest  to  be  paid  thereof,  be  entered 
in  some  book  to  be  kept  by  the  secretary  or  clerks  of  the  said  company; 
which  said  book  may  be  perused  at  all  reasonable  times  by  any  of  the  pro- 
prietors or  mortgagees  of  the  said  undertaking  or  other  persons  interested 
therein,  without  fee  or  reward." 

2  For  the  registration  of  each  transfer,  the  company  should  be  paid  the 
sum  of  two  shillings  and  sixpence.     Ibid. 

103 


104  RAILWAY   FINANCE  IN   ENGLAND  [104 

many  years,  and  were  found  quite  beneficial,  and  so  in  the  Com- 
panies Clauses  Consolidation  Act  of  1845,  we  find  general  pro- 
visions made  for  the  registration  of  railway  securities.  In  sub- 
stance, these  general  clauses  were  similar  to  those  of  the  earlier 
private  acts,  with  the  exception  (1)  that  the  time  limit  within 
which  the  transfers  should  be  registered  was  extended  from 
twenty-one  to  thirty  days,  and  (2)  that  until  such  entry  (of  the 
transfer)  was  made  the  company  shall  not  be  in  any  manner 
responsible  for  the  transfer  of  such  mortgage,  thus  making  the 
registration  less  rigid  but  of  greater  consequence  to  the  secur- 
ity-holders. The  latter  did  not  appear  eager  to  avail  them- 
selves of  the  provision  of  the  early  acts  requiring  the  registra- 
tion of  the  purchase  and  transfer  of  railway  securities.  It  was 
felt  that  unless  registration  was  made  a  condition  of  the  validity 
of  such  securities,  the  provision  would  remain  a  dead  letter. 
Hence,  the  new  provision  of  1845  was  passed  making  it  neces- 
sary to  register  all  transfers  in  order  to  render  the  company  in 
any  wise  responsible  to  the  transferee. 

Thus  from  the  time  Parliament  began  to  prescribe  the  limit 
of  railway  borrowing  powers,  it  adopted  this  system  of  regis- 
tration as  a  means  of  securing  the  observance  of  the  same.  It 
thought  that  since  all  securities  were  registered  in  the  companies' 
registers  and  since  such  registers  were  open  to  public  inspection, 
there  would  be  little  chance  for  the  companies  to  exceed  the  limit 
of  their  borrowing  powers  without  being  at  once  detected.  But 
although  the  manner  of  registration  was  threshed  out  with  much 
precision,  the  execution  of  such  registration  was  left  entirely  in 
the  hands  of  the  companies.  Prior  to  1863,  outside  of  occasional 
agitations,  practically  no  effort  had  been  made  to  modify  these 
provisions.  The  general  opinion  was  that  the  registration  done 
by  the  companies  themselves  was  sufficient  to  prevent  irregular- 
ities. The  public  relied,  and  justly  in  ordinary  cases,  on  the 
integrity  of  the  companies.3  Unfortunately,  however,  in  some 
cases  this  reliance  was  ill-founded.  Many  companies  made  so 
little  use  of  registration  that  they  were  not  aware  of  the  exact 
limits  of  their  borrowing  powers,  as  prescribed  by  Parliament ;  * 

s  Economist,  May  2,  1863. 

*  Letter  in  London  Times,  August  23,  1866. 


105]  REGISTRATION    OF   RAILWAY    SECURITIES  105 

and  many  others  purposely  exceeded  their  limits  in  borrowing.5 
Indeed,  the  practice  of  overborrowing,  as  remarked  the  Earl  of 
Donong,6  actually  reached  the  stage  not  only  of  illegality  but  of 
fraud.  The  public  were  told  that  Parliament  had  put  a  limit  to 
the  borrowing  powers  of  railway  companies,  but  they  soon  found 
out  that  under  the  semblance  of  this  limit  money  was  borrowed 
every  day  beyond  the  authority  which  Parliament  had  given.7 
Consequently,  doubt,  suspicion  and  dissatisfaction  prevailed, 
which  in  turn  depreciated  the  value  of  railway  securities  so  much 
that  they  were  sometimes  called  insecurities? 

This  unsatisfactory  state  of  affairs  gave  rise  to  agitation.  A 
number  of  chambers  of  commerce  and  other  commercial  bodies 
petitioned  Parliament  in  1863  to  modify  the  existing  law,  so  that 
railway  debentures  might  be  required  to  be  registered  and  put 
on  the  same  footing  as  landed  securities.  Instead  of  the  regis- 
ters kept  by  the  companies  as  required  by  the  Companies  Clauses 
Act  of  1845,  which  really  formed  no  security  to  the  public,  it 
was  urged  that  there  should  be  public  registers  kept  in  places  of 
easy  access.9  A  scheme  for  such  registration  10  was  presented  to 
the  select  committee  of  1863  to  the  effect  that  every  railway  com- 
pany should  be  compelled  to  furnish  the  lender  with  a  certificate 
stating  that  the  latter  was  the  registered  proprietor  of  the  un- 
dermentioned debenture  bonds  or  other  securities,  duly  sealed 
with  the  corporate  seal  of  the  company. 

According  to  this  scheme,  these  certificates  were  to  be  register- 
ed in  the  Bank  of  England  by  a  public  registrar  and  the  regis- 
tration was  to  be  followed  up  with  a  series  of  acknowledgments 
which  would  place  it  beyond  doubt.  Holders  of  registered  se- 
curities would  alone  be  recognized  as  bondholders  according  to 
acts  of  Parliament  and  alone  would  be  entitled  to  exercise  the 

s  The  West  Hartlepool,  the  Cork  &  Yanhol,  the  Carmarthan  and  Cardi- 
gan, and  the  London,  Chatham  and  Dover  were  in  this  class.  Cf.  Economist, 
June  20,  1863,  Hansard,  182 :  1580-1583,  and  Economist,  December  22,  1866. 

e  Hansard,  177:  1297. 

7  Ibid.,  183:  869. 

8  Economist,  August  12,  1865. 

9  Evidence  before  select  committee  of  1864  on  Kailway  Borrowing  Pow- 
ers, 1864,  p.  12. 

^Eailway  Times,  October  3,  1863. 


106  RAILWAY   FINANCE   IN   ENGLAND  [106 

rights  of  interference  which  the  law  accorded  to  mortgagees.  On 
the  other  hand,  if  the  holder  of  such  securities  failed  to  register 
he  would  not  be  deprived  of  his  money  or  of  his  common  law 
right,  but  simply  of  those  extraordinary  privileges  which  be- 
longed to  the  rightful  and  recognized  mortgagees. 

To  form  a  complete  check,  it  was  also  urged  that  the  Board  of 
Trade  should  be  furnished  with  returns  showing  the  extent  of 
the  borrowing  powers  of  each  company.  Then  the  proposed 
public  registrar,  being  in  an  independent  office,  should  furnish 
the  Board  of  Trade  with  a  return  compiled  from  the  registration 
of  the  securities  of  each  company,  showing  the  amount  which  each 
company  had  borrowed.  By  comparing  these  two  independent 
returns,  the  Board  of  Trade  could  easily  ascertain  whether  or  not 
a  company  had  exceeded  its  borrowing  powers. 

Another  plan  was  proposed  by  the  Deputy  Keeper  of  the  Sig- 
net of  Scotland11  to  the  effect  that  (1)  public  registers  should 
be  kept  in  London,  Edinburgh  and  Dublin;  (2)  that  all  existing 
companies  having  debenture  debts  or  stocks  should  be  required 
to  give  to  the  respective  registrars  a  return  duly  certified  as  on  a 
certain  date,  specifying  the  acts  of  Parliament  under  which  they 
were  authorized  to  borrow  money,  the  amount  so  authorized,  the 
amount  which  the  shareholders  had  authorized  to  be  borrowed  by 
resolution  of  general  meetings,  and  the  dates  of  such  meetings, 
together  with  the  amount  of  debenture  bonds  and  stocks  which 
had  been  issued  and  was  then  due  and  outstanding  against  each 
company;  and  (3)  that  all  existing  and  future  companies  should 
be  required  to  make  returns  from  time  to  time  of  all  acts  there- 
after passed  authorizing  the  borrowing  of  money  or  effecting  any 
changes  of  their  borrowing  powers. 

He  also  proposed  that  each  return  should  be  registered  in  a 
separate  book  or  a  part  of  a  book  for  each  company.  It  should 
be  incumbent  on  all  companies,  after  the  designated  date,  to 
transmit  to  the  respective  registrars  for  registration,  before  they 
were  issued,  all  debentures  and  certificates  of  debenture  stocks. 
The  registrar  should  register  these,  entering  the  number,  date, 
amount,  etc.,  in  a  special  form  prepared  for  the  purpose.  A 
registration  fee  was  also  recommended.  Then  after  such  regis- 

n  See  evidence  before  Lords'  Committee  of  1864,  pp.  4-15. 


107]  REGISTRATION    OF   RAILWAY   SECURITIES  107 

tration  the  registrar  should  certify  on  each  instrument  the  fact 
and  date  of  such  registration. 

To  form  a  complete  check,  he  also  proposed  that  it  should  be 
incumbent  on  the  companies  to  send  in  for  registration  all  de- 
bentures or  other  vouchers  of  debenture  loans  or  stock  which  were 
discharged.  These  should  be  registered  under  a  separate  head- 
ing in  the  book  or  part  of  the  book  applicable  to  each  company. 

This  system,  it  must  be  observed,  was  intended  for  the  regis- 
tration of  all  debentures  or  debenture-stock  certificates  to  be  is- 
sued thereafter.  It  was  suggested  that  existing  debentures  should 
also  be  registered.  The  Deputy  Keeper  of  the  Signet,  however, 
was  of  the  opinion  that  it  would  be  rather  cumbersome  to  re- 
quire the  registration  of  all  existing  securities.  Moreover,  such 
a  process  would  not  afford  any  additional  security  than  that 
afforded  by  simply  requiring  all  companies  to  give  the  total 
amounts  of  securities  which  they  had  issued. 

Others  were  of  the  opinion  that  it  was  necessary  to  have  a 
public  register  of  all  transfers  and  renewals  in  addition  to  the 
'registration  done  by  the  companies  as  provided  by  the  Compa- 
nies Clauses  Act  of  1845.  Although  such  transfers  or  renewals 
did  not  affect  the  borrowing  powers,  their  consummation  should, 
nevertheless,  be  made  more  definite  through  a  system  of  public 
registration.  Accordingly,  another  elaborate  form  Was  recom- 
mended for  the  purpose. 

A  representative  of  the  Board  of  Trade  also  suggested  a  form 
for  registration  purposes  very  similar  to  this. 

Under  such  a  system  of  registration,  it  was  thought  that  am- 
ple protection  would  be  afforded  the  public.  By  these  tables 
the  public  could  see  the  amount  authorized  by  Parliament,  the 
amount  sanctioned  by  the  shareholders  to  be  borrowed,  and  the 
number  of  securities  discharged.  A  comparison  of  the  figures 
given  in  the  proposed  tables  would  indicate  at  once  how  much 
legal  debt  was  out-standing  against  the  company  and  the  con- 
dition of  the  company's  borrowing  power.  It  was  also  recog- 
nized that  there  would  not  be  much  trouble  to  start  such  a  sys- 
tem of  registration,  since  a  similar  system  of  registration  had 
already  been  used  in  the  case  of  landed  securities.12 

12  There  were  already  registration  offices  under  the  Companies  Act,  1862. 
Cf.  Evidence  before  Lords'  Committee  of  1864,  p.  4. 


108  RAILWAY   FINANCE   IN   ENGLAND  [108 

It  was  further  urged  that  if  the  registrars  were  appointed 
with  definite  instructions  to  register  nothing  beyond  what  the 
companies  were  authorized  to  issue,  the  people  would  be  able 
to  tell  at  once  whether  any  security  was  legal  or  not.  It  could 
be  safely  expected  that  no  man  would  think  of  lending  money 
upon  debentures  which  were  not  registered.13 

The  agitation  for  a  simple  and  effective  system  of  registration 
appears  to  have  been  most  keen;  the  matter  was  of  wide  in- 
terest. The  general  opinion  of  stock  brokers,  money-lenders, 
and  the  like  was  unanimously  in  favor  of  .some  sort  of  govern- 
mental registration.  The  railways  as  a  whole,  according  to  the 
representatives  of  some  of  the  leading  lines  hi  the  kingdom,  en- 
tertained no  objection  against  the  compulsory  registration  of 
their  securities.14  Some  of  them  would  even  welcome  such  a 
procedure.  The  solicitor  of  the  Bank  of  England,  which  estab- 
lishment was  then  a  large  investor  in  the  securities  of  railway 
companies,  was  also  strongly  in  favor  of  such  a  system  of  regis- 
tration.15 Indeed,  the  concensus  of  opinion  as  expressed  before 
the  Lords'  Committee  of  1864  was  that  the  investors  had  too 
much  trust  in  the  honor  of  railway  officials  in  connection  with 
their  borrowing  powers  and  that  a  public  registration  of  railway 
debentures,  if  constructed  upon  some  simple  principle,  was 
needed  to  restore  and  maintain  confidence.  Such  a  system  of 
registration  would  ultimately  prove  to  be  an  advantage  not  only 
to  the  investing  public  but  to  the  railway  companies  as  well. 

Furthermore,  since  neither  investors  nor  borrowers  were  able 
to  ascertain  the  legality  of  some  of  the  existing  securities,  it 
was  asked : 16  Why  was  it  not  feasible  for  the  government  to 
investigate  and  establish  the  legality  of  such  securities  for  them? 
It  was  suggested  that  the  Board  of  Trade  might  effectually  do 
for  every  person  what  he  could  not  do  for  himself,  and  which, 
even  if  it  were  possible  for  each  individual,  would  have  to  be 
done  over  and  over  again  by  every  successive  holder  of  each 
railway  debenture.  Thus  it  was  urged  that  the  railway  corn- 
is  Evidence  before  Lords'  Committee,  1864,  p.  12. 

i*  More  than  eight  of  the  influential  chambers  of  commerce  openly  ex- 
pressed their  desire  for  such  a  course  of  public  registration.  Ibid.,  pp. 
14-15. 

IB  Hansard,  181 :  338-9. 

IB  Economist,  May  2,  1863. 


109]  REGISTRATION    OP   RAILWAY    SECURITIES  109 

panies  should  be  required  to  certify  to  the  Board  of  Trade 
every  new  issue  of  debenture.  Only  after  due  examination  and 
being  satisfied  that  the  company  had  not  exceeded  its  borrowing 
powers,  the  Board  of  Trade  should  give  the  company  stamped 
debentures  for  that  specific  amount.  According  to  the  opinion 
of  the  managing  director  of  the  Lands  Improvement  Company,17 
securities,  unless  so  stamped,  should  not  receive  any  legal  recog- 
nition. By  this  process  every  debenture  holder  whose  deben- 
ture had  the  mark  of  the  Board  of  Trade  impressed  upon  it 
would  be  sure  that  he  held  a  good  security.  The  credit  of  the 
companies  would  also  be  benefited  by  the  removal  of  the  ex- 
isting suspicion. 

The  consideration  of  the  matter  was  taken  up  by  Parliament. 
As  mentioned  in  a  previous  chapter,18  when  the  special  report 
and  evidence  upon  the  West  Hartlepool  Harbor  and  Railway 
bill  were  presented  to  the  House  of  Lords,  great  alarm  was  felt 
over  railway  borrowings  by  that  and  other  companies.  Action 
by  Parliament  was  obviously  necessary  if  the  alarm  were  not 
to  spread.  Accordingly  in  1863  the  House  of  Lords  appointed 
a  committee  on  railway  borrowing  powers  to  inquire  and  report 
as  to  what  legislative  measures  were  desirable  to  prevent  the 
railway  companies  from  exceeding  their  borrowing  powers. 
This  committee,  therefore,  recommended 19  that  semi-annual 
declaration  of  the  state  of  the  borrowing  powers  signed  by  the 
chairman,  the  secretary,  and  a  director  of  the  company  should 
be  published  in  the  London  Gazette  by  every  railway  company 
exercising,  or  claiming  to  exercise,  borrowing  powers  under  any 
act  of  Parliament.  In  this  declaration,  the  amount  paid  up  and 
the  amount  which  the  company  was  legally  authorized  to  borrow 
by  the  creation  of  debt,  should  be  clearly  set  forth.  These  officers 
of  the  company  should  also  declare  that  the  total  amount  now 
raised  by  the  company  upon  bonds  or  other  securities  did  not 
exceed  the  above  mentioned  amount,  upon  which  the  company 
could  legally  borrow. 

The  committee  also  recommended  that  thereafter  no  mortgage 

IT  Evidence  before  Lords'  committee  of  1864,  pp.  22-33. 

is  Cf.  supra,  p.  118. 

is  This  part  of  the  committee 'a  report  and  evidence  are  published  in 
Eailway  Times  for  August  22,  1863.  See  also  Report  of  Lords'  committee, 
1864,  p.  27. 


110  RAILWAY   FINANCE   IN   ENGLAND  [110 

bond  or  any  security  for  money  should  be  issued  by  any  rail- 
way company  without  having  endorsed  upon  that  security  a 
certificate  in  the  following  form,  to  be  signed  by  the  chairman 
and  secretary  of  the  company: 

"A.  B.  Railway  Company.  Date. 

Bond  for No ,  being  part  of  the  total  amount 

which  this  company  can  now  legally  borrow." 

A  plan  for  the  registration  of  all  securities  by  an  independent 
public  office  was  suggested  to  the  committee,  but  while  the  com- 
mittee conceded  that  such  a  regulation  "might  operate  for  the 
security  of  the  public,"  it  felt  that  it  did  not  have  sufficient 
time  to  give  full  consideration  to  the  subject. 

Parliament  did  not  take  any  immediate  action  to  give  effect 
to  those  recommendations.  But  when  the  Companies  Clauses 
Bill  of  1863  was  considered  in  committee  in  the  House  of  Com- 
mons, M.  D.  Hassard  moved  the  insertion  of  a  clause  requiring 
companies  possessing  borrowing  powers  to  make  an  annual  re- 
turn to  Parliament  of  the  capital  which  they  had  raised.  This 
motion  was  rejected  on  the  ground  that  it  was  not  proper  to  in- 
sert a  provision  of  such  importance  into  a  bill  which  was  only 
intended  to  consolidate  the  clauses  commonly  inserted  in  com- 
panies bills.20  In  the  same  year,  however,  in  connection  with 
the  regulation  of  the  issue  of  debenture  stocks,  Parliament 
adopted  a  provision  for  the  registration  of  such  stocks.  This 
provision  21  did  not  contain  any  new  principle.  It  simply  made 
the  rule  regarding  the  registration,  by  the  companies  of  mort- 
gages, deeds,  etc.,  applicable  to  the  registration  of  debenture 
stocks.  In  the  same  act,  Parliament  also  adopted  a  clause  22 
requiring  all  companies  to  keep  a  separate  account  of  debenture 
stocks,  showing  how  much  money  had  been  received  for  or  on 
account  of  debenture  stocks.  Also  how  much  money  was  borrowed 

20  Hansard,  172 :  936. 

21  Sec.  28  of  the  Companies  Clauses  Act,  1863,  provided  that  the  com- 
pany should  from  time  to  time  enter  the   debenture  stock  created  in  a 
register  to  be  kept  for  that  purpose.     In  the  register  it  was  to  enter  the 
names  and  addresses  of  the  persons  and  corporations  who  are  holders  of 
such  stock,  with  the  respective  amounts  of  each;  and  the  register  was  to  be 
accessible  for  inspection  and  perusal  at  all  reasonable  times  to  every  mort- 
gagee, etc.,  without  charge. 

22  Sec.  33. 


Ill]  REGISTRATION    OF   RAILWAY   SECURITIES  111 

or  owing  on  mortgage  or  bond,  or  which  they  had  power  to 
borrow,  had  been  paid  off  by  debenture  stock  instead  of  being 
borrowed  on  mortgage  or  bond. 

At  the  same  time  some  members  of  Parliament  also  considered 
the  advisability  of  bringing  in  a  bill  for  the  purpose  of  carrying 
out  the  recommendations  of  the  committee  on  railway  borrowing 
powers  of  1863. 23  But  it  was  feared  that  those  recommenda- 
tions would  be  of  little  value  unless  provisions  were  made  for 
general  registration  of  debenture  transactions.  Moreover,  it 
was  still  felt  that  further  information  was  needed  on  the  sub- 
ject of  registration  before  any  efficient  system  could  be  adopted 
to  cope  with  the  situation.  Therefore,  another  select  committee 
was  appointed  in  1864,  to  continue  the  inquiry  commenced  by 
the  select  committee  of  the  previous  year.24  In  its  report,  this 
committee  first  of  all  recommended  that  requirement  of  a  com- 
pulsory public  registration  of  railway  debentures  and  deben- 
ture stocks  as  an  efficient  means  whereby  to  restrain  the  direc- 
tors from  exceeding  the  limit  of  their  statutory  borrowing  pow- 
ers.25 The  committee  was  also  of  the  opinion  that  holders  of 
statutory  debentures  duly  registered  should  have  a  right  to  re- 
cover and  secure  the  payment  of  all  principal  and  interest  due 
to  them  in  priority  to  the  holders  of  Lloyd's  bonds,  or  of  any 
other  obligations  or  acknowledgments  of  indebtedness  not  is- 
sued under  the  authority  of  Parliament.26 

Following  the  recommendation  of  this  committee,  the  Regis- 
tration of  Railway  Debentures,  etc.,  Bill  was  introduced  into  the 
House  of  Lords  in  1865.27  This  bill  was  in  a  great  measure 
founded  on  the  report  of  foregoing  committee.28  It  passed  the 
upper  house  without  much  discussion,  but  it  wjent  to  the  lower 
house  late  in  the  session.29  The  promoters  of  the  bill  thought 
it  would  meet  with  severe  opposition  from  the  powerful  railway 
interests  in  that  house.30  Therefore,  they  did  not  push  the 

23  Hansard,  173 :  1317. 

24  Ibid.,  175:  697. 

25  Report  of  Lords'  Committee,  1864,  p.  111. 

26  Ibid. 

27  Hansard,  180 :  848. 

28  Hansard,  184:  1704. 

29  Ibid.,  180 :  848. 

so  In  1864  there  were  no  less  than  153  railway  directors  (not  to  speak 


112  RAILWAY    FINANCE   IN   ENGLAND  [112 

measure  vigorously.  After  being  read  a  second  time,  it  was 
"put  off"  for  a  fortnight,  and  nothing  was  done  with  it  that 
year.31 

At  this  time  it  must  be  remembered  that  there  was  much  con- 
fusion over  the  legality  of  railway  securities.  Many  companies 
were  forced  to  declare  their  inability  to  observe  accurately  the 
limits  of  borrowing  powers  prescribed  by  the  numerous  acts  of 
Parliament.  The  public  also  became  aware  that  under  the  sem- 
blance of  compliance  with  the  limit  prescribed  by  Parliament, 
money  was  borrowed  every  day  beyond  the  authority  given. 
Parliament  itself  was  forced  to  recognize  the  unfortunate  state 
of  affairs.32  It  appeared  timely  to  legislate  on  the  matter,  but 
it  was  thought  impolitic  to  start  too  stringent  rules  so  as  to 
"make  it  safe  for  people  to  jump  in  the  dark."  As  a  compro- 
mise between  the  extreme  views,  the  Marquess  of  Clanricarde  re- 
vived the  agitation  of  the  previous  year  by  proposing  that  every 
company  should  be  compelled  to  make  periodical  returns  and 
that  Parliament  should  adopt  some  system  of  public  registra- 
tion so  as  to  enable  the  people  to  judge  for  themselves.33  In 
the  meantime  a  bill 3*  for  the  registration  of  railway  debentures, 
which  was  substantially  the  same  as  that  of  the  previous  ses- 
sion, was  introduced  into  the  House  of  Commons.35  This  bill 
contained  thirteen  clauses  and  dealt  in  detail  with  the  yearly 
returns  to  the  registrar  of  joint  stock  companies,  the  appoint- 
ment of  assistant  registrars  by  the  Board  of  Trade,  and  the 
question  of  fees,  and  other  questions.  It  also  contained  three 
schedules,  of  which  the  first  was  concerned  with  the  reports  on 
borrowing  powers,  the  second  with  the  registration  of  the  issue 
of  bonds  and  debentures  and  of  certificates  of  debenture  stock, 

of  engineers,  bankers,  or  contractors)  in  the  House  of  Commons,  nearly  one- 
fourth  of  the  chief  branch  of  the  legislature  being  thoroughly  identified 
with  the  railway  interest  in  the  country.  Some  of  the  railway  directors, 
however,  were  not  returned  to  Parliament  for  the  purpose  of  representing 
the  railway  interest,  others  were  solicited  to  become  members  of  railway 
boards  in  consequence  of  their  being  members  of  Parliament.  Railway 
Times,  January  16,  1864. 

si  Hansard,  180 :  848. 

32  Ibid.,  183 :  869. 

ss  Hansard,  183 :  869. 

34  Bill   No.   109,   1866. 

ss  Hansard,  182:1577;   181,  pp.  336-338. 


113]  REGISTRATION    OP   RAILWAY   SECURITIES  113 

and  the  last  with  the  registration  of  discharges  of  debentures 
and  debenture  stock. 

In  spite  of  the  general  need  of  some  system  of  registration, 
however,  the  railway  interests  raised  considerable  objection  to 
the  provisions  proposed  by  this  bill.36  In  the  first  place,  they 
claimed  that  such  a  system  of  compulsory  registration  would 
give  to  the  registered  securities  an  apparent  validity  which  they 
did  not  have  intrinsically,  and  that  it  was  impossible  for  the  pro- 
posed registrar  in  charge  of  the  annual  returns,  etc.,  to  ascertain 
whether  bonds  submitted  to  him  were  or  were  not  issued  within 
the  borrowing  powers  of  that  company.  But  the  railway  inter- 
ests, as  remarked  the  Earl  of  Belmore,  failed  to  notice  that  all 
the  bill  proposed  to  do  was  exactly  what  had  been  done  for  the 
preceding  150  years  with  regard  to  the  registration  of  deeds  in 
Ireland.  All  land  deeds  had  to  be  registered  in  the  Rolls  Office 
in  Dublin.  This  was  exactly  the  proposition  as  regards  the 
registration  of  railway  securities,  and  it  did  not  seem  probable 
that  the  registration  in  the  case  of  railway  securities  would  give 
the  debentures  any  more  validity  than  it  would  convert  a  false 
deed  in  Ireland  into  a  good  one.  The  only  object  of  the  require- 
ment was  to  show  the  numbers  and  amounts  of  the  securities 
issued  by  each  company  so  that  the  investors  might  be  able  to  as- 
certain for  themselves  which  securities  stood  in  relative  priority. 

Another  objection  against  this  compulsory  registration  of  rail- 
way securities  was  that  this  requirement  would  take  away  from 
the  directors  the  feeling  of  responsibility,  which  they  were  then 
supposed  to  have.  If  the  directors  were  divested  of  their  duty 
of  looking  into  the  limits  of  their  borrowing  powers  and  were  re- 
quired by  law  to  rely  upon  the  findings  of  some  government 
office  in  regard  to  the  exercise  of  their  borrowing  powers,  they 
might  be  induced  to  shirk  the  responsibility  of  keeping  their 
loans  within  the  limit.  But  this  argument  could  not  hold  in  the 
face  of  the  fact  that  many  railway  directors  themselves  often  did 
not  know  either  the  extent  of  their  responsibility  or  the  exact 
limit  of  their  borrowing  powers. 

A  general  objection  was  also  made  on  the  ground  that  such 
registration  would  interfere  with  the  proper  conduct  of  the  com- 
panies' business.  Extra  forces  of  men  would  have  to  be  em- 

se  Ibid.,  181 :  336-338. 


114  RAILWAY   FINANCE  IN   ENGLAND  [114 

ployed  in  order  to  prepare  the  required  returns,  and  the  regular 
business  would  be  interfered  with.  But  the  supporters  of  the 
bill  retorted  that  no  one  would  deny  that  the  required  compul- 
sory registration  would  mean  some  extra  work  for  the  railways, 
but  that  it  must  also  be  conceded  that  the  increased  value  of  their 
securities  due  to  such  registration  would  more  than  compensate 
them  for  any  minor  inconveniences  which  they  would  have  to 
incur. 

While  this  bill  was  progressing,  the  Government  was  also  plan- 
ning to  bring  in  a  bill  to  give  effect  to  some  of  the  recommenda- 
tions of  both  of  the  select  committees  on  railway  borrowing 
powers.37  Thus,  in  May  1866,  a  measure  called  the  Railway 
Companies  Securities  Bill  was  introduced  by  the  president  of 
the  Board  of  Trade  into  the  House  of  Commons.38  This  bill  dif- 
fered from  the  Registration  of  Railway  Debentures,  etc.,  Bill  in 
that  while  the  former  was  based  largely  on  the  report  of  the 
Lords'  Committee  on  railway  borrowing  powers  of  1863,  the  lat- 
ter embodied  the  recommendations  of  the  committee  of  1864. 

Soon  after  the  introduction  of  this  measure,  the  Registration 
of  Railway  Debentures,  etc.,  Bill  was  withdrawn  39  without  any 
discussion.  The  government  measure,  after  being  examined  and 
considered  in  committees  and  amended  considerably,  was  adopted 
and  has  since  been  known  as  the  Railway  Companies  Securities 
Act  of  1866.40  Its  primary  purpose  was  to  amend  the  law  re- 
lating to  securities  issued  or  to  be  issued  by  railway  companies. 
The  principal  provisions  may  be  summed  up  as  follows:  (1) 
Every  railway  company,  on  or  before  January  15,  1867,  should 
register  and  keep  registered  at  the  office  of  the  Joint  Stock  Com- 
panies the  names  of  their  secretary,  accountant,  treasurer,  or 
chief  cashier  for  the  time  being  authorized  to  sign  instruments 
under  the  act.  (2)  Within  fourteen  days  after  the  end  of  each 
half  year  every  railway  company  should  make  an  account  of 
their  loan  capital  authorized  to  be  raised  and  actually  raised  up 
to  the  end  of  that  half  year,  specifying  the  particulars  described 
in  the  schedules  of  the  act.  (3)  The  Board  of  Trade  was  au- 
thorized to  prescribe,  by  notice  in  the  London  Gazette,  the  forms 

37  Hansard,  181 :  338-339. 
ss  IUd.,  183 :  1197. 

39  It  was  withdrawn  on  July  23,  1866.     Ibid.,  184:  1279. 

40  29  &  30  V.  c.  108. 


115]  REGISTRATION    OF   RAILWAY   SECURITIES  115 

in  which,  the  half-yearly  accounts  were  to  be  kept.  Such  ac- 
counts were  to  be  open  to  the  inspection  of  shareholders,  etc.,  at 
all  reasonable  times,  without  charge.  (4)  Within  twenty-one 
days  of  the  end  of  each  half  year  every  railway  company  should 
deposit  with  the  Registrar  of  Joint-Stock  Companies  a  copy, 
certified  and  signed  by  the  company 's  registered  officers  as  a  true 
copy,  of  their  loan  capital  half-yearly  account,  and  it  should  be 
unlawful  for  any  railway  company  to  borrow  any  money  unless 
and  until  it  had  first  deposited  the  aforesaid  accounts.  Failure 
to  deposit  such  accounts  or  to  register  its  proper  officer  should 
render  the  company  liable  to  a  fine  not  exceeding  £20  for  the 
initial  offense  and  a  penalty  not  exceeding  £5  per  day  during 
the  time  which  the  offense  continued.  (5)  Any  person  might 
inspect  the  documents  kept  by  any  registrar  on  the  payment  of 
one  shilling  for  each  inspection,  and  might  have  certified  extracts 
furnished  him  on  the  payment  of  additional  fees.  It  was  fur- 
ther provided  that  thereafter  two  of  the  directors  and  the  regis- 
tered officers  of  each  company  should  endorse  on  every  deben- 
ture, ' '  each  for  himself, ' '  as  stated  in  the  act,  that,  so  far  as  he 
knew  the  debenture  was  issued  duly  and  was  within  the  pre- 
scribed limits  to  the  borrowing  powers.  In  case  any  mortgage 
deed  or  bond  was  delivered  without  such  a  declaration,  the  com- 
pany should  be  liable  to  a  penalty  not  exceeding  £20  for  every 
offense,  and  if  any  officer  or  director  knowingly  permitted  the 
delivery  of  such  mortgage,  deed,  etc.,  he  should  be  personally 
liable  to  the  same  penalty  as  that  of  the  company.  Moreover,  if 
any  director  or  registered  officer  of  a  company  signed  any  dec- 
laration, account,  or  statement  required  by  the  act,  knowing  the 
same  to  be  false  in  any  particular,  he  should  be  deemed  guilty 
of  an  offense  against  the  act  and  should  be  liable  to  a  fine  or 
imprisonment. 

It  may  be  noticed  that  all  the  provisions  contained  in  the  act 
had  been,  more  or  less,  generally  conceded  as  being  necessary. 
Parliament  did  not  adopt  any  of  the  more  stringent  measures, 
such  as  the  compulsory  stamping  of  each  security  by  the  govern- 
ment, etc.,  for  fear  that  in  trying  to  require  too  much  at  a  time 
the  whole  program  might  be  either  defeated  or  made  difficult  of 
application.  Most  of  the  provisions,  therefore,  were  passed  with- 
out much  opposition  in  either  house  of  Parliament. 

But  of  even  greater  importance  were  the  provisions  governing 


116  RAILWAY   FINANCE   IN   ENGLAND  [116 

the  make-up  of  these  returns  as  required  by  the  act.  No  matter 
what  efficient  rules  were  adopted  to  enforce  the  making  of  re- 
turns, the  system  would  be  of  little  value  if  the  returns  them- 
selves were  inadequate.  It  may  be  remarked  that  two  distinct 
things  were  required,  namely:  (1)  half-yearly  account  of  the 
loan  capital  of  the  company,  and  (2)  a  statement  of  the  borrow- 
ing powers.  The  half-yearly  accounts  were  required  to  show 
the  acts  of  Parliament  under  the  power  of  which  the  company 
had  borrowed  money,  the  amounts  of  loans  authorized  and  the 
amounts  raised  by  loans,  besides  other  important  accounting  de- 
tails ; 41  while  the  statement  of  the  borrowing  powers  should  con- 
tain information  concerning  (1)  the  acts  of  Parliament  con- 
ferring the  borrowing  powers  and  the  conditions  under  which 
the  powers  may  be  exercised,  (2)  the  amount  of  mortgage  or 
bonded  debt  or  debenture  stock  authorized,  and  (3)  the  date  at 
which  such  conditions  have  been  fulfilled. 

This  act  proved  disappointing  to  some,  in  that  it  failed  to 
embody  many  of  the  more  stringent  measures  demanded.  Thus 
the  Economist  said :  42 

"English  legislation  abounds  in  abortive  expedients.  It 
shrinks  from  difficulties.  There  is  very  commonly  an  admitted 
evil,  and  very  obviously  only  one  real  remedy.  But  very  often 
that  real  remedy  is  painful,  and  if  public  attention  is  but  half 
aroused  to  the  subject,  we  are  apt  to  put  up  with  some  half- 
measure  which  gives  little  or  no  trouble,  which  looks  as  if  it 
might  mend  matters  a  little,  and  which  has  no  disadvantage  save 
that  it  is  not  a  searching  cure  of  the  evil  to  be  remedied,  and 
that  in  a  little  while  it  will  be  forgotten  on  account  of  the  slight- 
ness  of  its  effect,  while  the  malady  itself  will  rage  as  much  as 
ever." 

"One  of  these  half-way  laws  is  the  Act  of  last  session  as  to 
railway  securities." 

This  important  financial  paper  contended  that  the  precautions 
provided  by  this  act  failed  exactly  at  the  weak  point.  What  was 
wanted  was  an  independent  audit,  a  warranty  by  a  competent 
and  impartial  authority  that  such  and  such  debentures  were 

*i  Cf.  first  schedule  of  the  Railway  Companies  Securities  Act,  1866.  Cf. 
also  infra,  Chap.  7. 

42  Economist,  October  27,  1866. 


117]  REGISTRATION    OP   RAILWAY   SECURITIES  117 

good.  "The  confusion,  not  to  say  worse,  of  the  affairs  of  some 
railways  has  been  so  great  that  those  connected  with  all  of  them 
are  inevitably  subject  to  a  doubt  Half  of  the  directors  in  dis- 
organized railways  do  not  know  what  is  being  done,  and  others 
wish  to  do  what  is  illegal.  Against  such  dangers,  the  act  gives 
no  security;  it  requires  certain  statements  to  be  made  which  all 
the  good  companies,  and  99  out  of  100  .  .  .  will  make  hon- 
estly, but  which  an  exceptional  company,  or  rather  some  few 
people  about  such  a  company,  may  make  dishonestly.  As  long 
as  you  rely  on  the  bona  fides  of  the  issuer  of  the  debenture  you 
are  not,  and  cannot  be,  safe  from  his  mala  fides."  ** 

The  act  seemed  to  have  failed  to  check  the  confusion  over  de- 
bentures at  least  during  the  three  or  four  years  after  its  passage. 
Nor  did  it  prevent  some  of  the  companies  from  exceeding  their 
borrowing  powers,  as  shown  by  the  fact  that  a  good  number  of 
railways  continued  their  former  practice  and  that  neither  the 
shareholders  nor  the  public  were  at  all  aware  of  the  liabilities 
to  which  the  companies  were  subject.4*  Moreover,  during  1867, 
the  year  after  the  act  was  passed,  many  railway  properties  be- 
came greatly  depreciated  and  a  feeling  sprang  up  throughout  the 
country  that  further  reform  was  needed.45  Thus  Lord  Redesdale 
felt  it  "extremely  necessary"  to  adopt  some  provisions  to  the 
effect  that  railway  securities,  unless  properly  registered,  should 
be  regarded  as  invalid.46 

In  this  connection  it  may  be  remarked  that  the  apparent  fail- 
ure of  the  Railway  Companies  Securities  Act  during  several 
years  after  its  passage  was  perhaps  due  more  largely  to  the  spec- 
ial momentum  of  the  established  habit  of  the  railway  companies 
to  over-borrow  rather  than  the  weakness  of  the  act  itself.  When 
the  state  of  railway  borrowing  had  reached  such  a  chaotic  condi- 
tion and  the  companies  had  become  so  used  to  exceeding  the 
limit  of  their  borrowing  powers,  as  they  were  during  the  early 
sixties,  it  would  take  some  time  to  make  any  signal  improvement, 
no  matter  what  measures  were  adopted.  Therefore,  the  contem- 
porary dissatisfaction  and  the  apparent  lack  of  good  results  from 

« ibid. 

44  Hansard,  190 :  1962. 

45  /bid.,  190 :  1955. 

id.,  190:  1962. 


118  RAILWAY   FINANCE  IN   ENGLAND  [118 

the  act  during  the  years  immediately  following  its  enactment  do 
not  necessarily  prove  that  the  act  was  ineffective.  On  the  con- 
trary, time  seemed  to  have  proven  the  act  of  great  value  in  spite 
of  its  defects,  in  helping  to  restore  order  out  of  the  financial 
chaos  which  existed  during  the  fifties  and  sixties.  An  English 
writer,47  after  criticising  the  English  system  of  regulation,  gave 
much  credit  to  this  act  as  having  done  "a  great  deal  towards 
placing  railway  finance  on  a  sounder  footing.  .  ." 

After  the  enactment  of  the  Railway  Companies  Securities  Act, 
Parliament  commenced  to  give  its  special  attention  to  the  adop- 
tion of  some  effective  system  of  accounting  as  a  possible  method 
of  regulating  railway  loan  capital  as  well  as  other  branches  of 
railway  finance.  Accordingly  special  legislation  for  the  purpose 
of  regulating  the  borrowings  of  railways  may  be  said  to  have 
closed  with  the  passage  of  this  act. 

Now  it  may  be  asked,  why  did  the  railway  companies  exceed 
the  limit  of  their  borrowing  powers?  What  was  the  reason  that 
directors  even  risked  their  personal  liability  to  issue  illegal  se- 
curities ?  It  is  true  that  some  directors  violated  the  law  for  inde- 
fensible reasons;  but  it  is  equally  true  that  in  some  instances 
they  were  practically  compelled  to  borrow  beyond  the  legal  lim- 
its. By  reason  of  the  restriction  of  loans  to  one-third  of  the 
share  capital  the  companies  were  naturally  always  at  the  limit 
of  their  borrowing  powers.  Thus  the  directors  were  placed 
under  an  obligation  at  a  certain  time  to  meet  a  large  amount  of 
debts  falling  due,  whatever  might  then  be  the  state  of  the  money 
market.  Therefore,  they  often  felt  it  necessary  to  raise  money 
beforehand  wrhen  the  state  of  the  money  market  was  easy.  More- 
over, it  often  became  necessary  for  a  company  to  create  new 
debts  in  anticipation  of  the  falling  due  of  the  old  debts  so  that 
its  creditors  or  financial  agents  might  not  be  able  to  take  advan- 
tage of  the  occasion  to  embarrass  the  company.  With  its  loans 
up  to  the  limit,  in  issuing  fresh  debentures,  the  company  in 
either  case  would  exceed  the  statutory  limit  of  its  borrowing 


48 


powers. 

In  answer  to  the  question  as  to  why  railway  directors,  especial- 
ly of  small  lines,  were  willing  to  evade  the  law  and  assume  the 

47  J.  S.  Jeans,  Eaihvay  Problems,  p.  23. 

48  Cf.  Economist,  May  2,  1863,  and  Hansard,  181 :   338. 


119]  REGISTRATION    OP   RAILWAY   SECURITIES  119 

risk  of  personal  liability,  the  Economist  said,49  "But  human  na- 
ture is  vain  and  weak,  and  the  directors  are  puffed  up  by  the 
little  local  importance,  and  flattered  by  secretaries  who  live  by 
the  line,  and  engineers  and  attorneys  who  make  a  large  profit 
out  of  it,  and  so  they  yield  and  ruin  themselves. ' ' 

Some  people  felt  that  the  limit  of  the  borrowing  powers,  which 
was  only  one-third  of  the  share  capital,  was  "utterly  inade- 
quate, ' ' 50  that  the  limit  was  too  small  compared  with  the  gen- 
eral practice  of  borrowing  on  other  mortgages,51  and  that  too 
strict  rules  would  invite  their  evasion.  Indeed,  it  was  contended 
that  this  inadequacy  of  borrowing  powers  was  responsible  for 
the  gross  violation  of  the  limit. 

Others  felt 52  that  it  was  not  within  the  power  of  the  legisla- 
ture to  put  any  effective  restrictions  upon  the  borrowing  powers 
of  railway  companies,  even  if  it  were  proper  to  do  so.  If  a  com- 
pany wanted  to  borrow,  it  would  find  some  way  of  doing  it  in 
spite  of  the  law.  Therefore,  it  was  urged  that  the  limit  upon 
borrowing  powers  should  be  removed  53  and  railways  should  be 
allowed  to  borrow  what  they  liked,  provided  that  they  made 
known  all  their  proceedings.  If  the  public  had  the  necessary 
information,  they  might  be  safely  given  absolute  freedom  in  ad- 
vancing their  money.54  If  the  limit  was  not  entirely  done  away 
with,  it  should  at  least  be  extended. 

Further  it  was  urged  that  the  borrowing  powers  of  railway 
companies  should  be  made  more  definite  and  the  law  governing 
the  same  should  be  more  strictly  enforced.  If  the  railway  direc- 
tors realized  that  there  were  absolute  limits  to  their  borrowing 
which  it  was  not  possible  to  evade,  they  would  make  better  ar- 
rangements beforehand,  and  would  not  be  so  speculative.  In- 
deed much  of  the  difficulty  was  attributed  to  the  facility  with 

49  Economist,  December  14,  1867. 

so  Evidence  before  Lords'  Committee,  1864,  p.  34. 

si  The  ordinary  margin  of  borrowing  with  reference  to  good  mortgage 
securities  was  two-thirds  of  the  share  capital.  See  evidence  before  Lords' 
Committee,  1864,  pp.  34-35. 

52  Evidence  before  Lords'  Committee  on  Bailway  Borrowing  Powers, 
1864,  p.  24. 

ss  Evidence  before  Royal  Commission  on  Railways,  1867,  pp.  803-836. 

5*  Evidence  before  Lords '  Committee  on  Railway  Borrowing  Powers, 
1864,  pp.  33-35. 


120  RAILWAY   FINANCE   IN   ENGLAND  [120 

which,  railway  directors  in  general  were  able  to  get  their  wrongs 
set  right  by  the  assistance  of  Parliament  in  patching  up  their 
former  acts.  Although  they  did  not  always  succeed  in  getting 
what  they  asked  for,  the  hope  of  being  able  to  do  it  operated 
strongly  upon  them.55  Parliament  in  its  desire  to  protect  deben- 
ture holders  by  limiting  the  borrowing  powers  had  led  the  public 
to  believe  in  the  thoroughness  of  the  protection ;  while  in  reality 
their  protection  was  by  no  means  satisfactory  so  long  as  the  law 
was  indefinite  and  loosely  enforced.56  Therefore,  it  was  urged 
that  the  limit  of  the  borrowing  powers  of  railway  companies 
should  be  made  more  definite  and  strictly  enforced,  or  that  there 
should  be  none  at  all. 

Another  defect  in  the  law  prior  to  1866  was  that  there  was  not 
any  effectual  means  to  ascertain  whether  or  not  the  law  had  been 
complied  with.  The  law  said  that  railways  should  not  issue  any 
debentures  unless  and  until  a  certain  proportion  of  their  capital 
had  been  paid  up,  but  it  left  the  enforcement  of  this  provision 
to  a  justice  of  the  peace.  It  limited  the  amount  that  the  railway 
could  borrow  but  in  practice  could  not  enforce  the  limitation. 
The  whole  trouble  seemed  to  be  briefly  this :  The  legislature  had 
given  a  privilege  of  borrowing  and  had  defined  the  extent  of  the 
privilege  as  well  as  the  conditions  under  which  the  privilege 
might  be  exercised;  but  under  the  circumstances  which  existed 
during  the  sixties  no  one  had  any  adequate  means  of  ascertain- 
ing whether  or  not  the  limit  had  been  exceeded  or  the  requisite 
conditions  had  been  fulfilled.57  Therefore,  it  was  recognized 
that  the  difficulty  was  a  legal  one  and  not  an  economic  one,  in 
that  the  earning  powers  of  the  railways,  on  the  whole,  were  such 
as  to  make  a  mortgage  on  railway  undertakings  "one  of  the  very 
best  securities. ' ' 58  Toward  removing  this  difficulty,  the  agita- 
tion as  well  as  the  laws  adopted  during  the  sixties  for  the  regis- 
tration of  railway  securities  seem  to  have  done  much. 


55  Evidence  lefore  Lords'  Committee  on  Eailway  Borrowing  Powers,  1864, 
p.  27. 

58  Evidence  before  Lords'  Committee,  1864,  p.  33. 

57  Economist,  May  2,  1863.     Cf.  also  Hansard,  171 :  1303. 

as  Economist,  October  20,  1866. 


CHAPTER  VI 
REGULATION  OF  RAILWAY  STOCK  WATERING 

Stock  watering  by  railways  may  be-  defined  as  the  nominal  in- 
crease of  railway  capital  without  any  commensurate  investment 
of  real  capital  in  the  concern.  It  amounts  to  the  fictitious  in- 
creasing of  the  capital  liabilities  by  mere  book  entries  and  the 
issuing  of  unpaid  certificates.  Stock  watering  has  several  forms, 
chief  among  which  may  be  mentioned  (1)  stocks  issued  partially 
to  represent  money,  which,  instead  of  being  used  for  improving 
the  property  is  paid  out  as  dividend;  (2)  stocks  issued  to  repre- 
sent an  actual  increase  in  the  earning  capacity  and  market  value 
of  the  property;  and  (3)  stocks  issued  to  give  certain  parties 
control  of  the  line  without  actually  risking  anything  like  the 
amount  nominally  represented  by  their  stocks.1  Stock  watering 
may  be  done  in  many  ways,  the  most  important,  as  it  is  practiced 
in  England,  are  those  of  mere  duplication  or  triplication  of  ex- 
isting stocks  or  the  creation  of  new  but  unpaid  stocks. 

Stock  watering  under  the  first  form  came  up  before  Parlia- 
ment in  1868,  in  connection  with  the  Regulation  of  Railways 
Bill  of  that  year.  The  Duke  of  Richmond  proposed  the  insertion 
of  a  clause  in  that  Bill  to  enable  railway  companies  to  issue 
preference  shares  which  had  been  authorized  and  remained  un- 
issued at  the  time,  in  lieu  of  dividends,  in  cases  where  by  a  vote 
of  no  less  than  three-fourths  of  the  holders  of  ordinary  shares 
any  portion  of  the  amount  declared  by  the  auditors  to  be  ap- 
plicable to  the  payment  of  dividends  on  the  ordinary  shares  is 
applied  to  the  redemption  of  debentures  or  to  the  execution  of 
authorized  works.  This  proposition  was  objected  to  on  the 
ground  that  it  would  enable  a  company  to  apply  its  earnings  to 
the  construction  of  new  works  or  the  redemption  of  debenture 
without  paying  anything  to  the  preference  shareholders.2 

1  Hadley,  Railroad  Transportation,  1903,  pp.  54-55. 

2  Railway  Times,  May  23,  1868,  p.  548. 

121 


122  RAILWAY   FINANCE   IN   ENGLAND  [122 

This  objection,  per  se,  did  not  appear  valid,  for  the  dividend 
on  the  ordinary  stock  was  distributable  only  after  the  claims  of 
the  preference  shareholders  had  been  satisfied.  Since  the  divi- 
dend on  the  ordinary  shares  of  a  company  was  duly  earned,  as  it 
was  required  to  be  in  this  case,  there  was  no  reason  why  that 
company,  with  the  consent  of  the  holders  of  its  ordinary  shares, 
should  not  be  permitted  to  issue  its  existing  preference  shares  in 
lieu  of  such  dividends.  Indeed,  as  the  Railway  Times  3  main- 
tained, it  appeared  strange  that  the  shareholders  could  not,  on 
their  own  accord  obtain  the  privilege  of  paying  themselves  "in 
paper  instead  of  in  cash."  The  difficulty  appeared  to  be  that 
Parliament  feared  the  proposal  would  prove  "extremely  unjust 
and  that  it  would  probably  lead  to  gross  mismanagement,  though 
it  would  not  be  open  to  so  much  objection  if  the  payment  were 
made  in  ordinary  instead  of  in  preference  stock. ' '  Some  prom- 
inent members  in  the  House  of  Lords 4  contended  that  ' '  if  Par- 
liament could  have  foreseen  the  evil  which  had  resulted  from  the 
issue  of  preference  stock,"  it  would  have  never  given  its  sanc- 
tion to  these  preference  shares.  The  difference  of  opinion  with 
regard  to  this  proposition  of  issuing  preference  shares  in  lieu 
of  dividends  appeared  to  be  so  strong  that  the  bill  was  with- 
drawn.6 

Thus  direct  stock  watering  in  England  has  been  practiced 
only  under  the  various  shades  of  the  second  form.  The  first 
form,  as  has  just  been  shown,  failed  to  receive  the  sanction  of 
law;  and  the  last  form,  which  is  by  far  the  most  objectionable, 
has  proved  impracticable  under  the  English  system  of  regulation 
and  the  conservative  business  sentiment  of  the  people. 

But  stock  watering  has  been  practiced  indirectly,  although  on 
a  small  scale,  ever  since  the  thirties.  One  of  these  early  methods 
of  indirect  stock  watering  was  to  pay  interest  on  calls  before  a 
line  was  opened,  and  then  charge  such  unearned  interest  to  cap- 
ital. This  practice  became  quite  common  during  the  forties.6 
From  its  appearance  it  was  quite  harmless,  but  in  reality  it  was 
nothing  but  a  pure  case  of  stock  watering,  in  that  such  charges 
of  unearned  interest  would  swell  the  capital  account  to  the  extent 

zEailway  Times,  May  23,  1868. 

*  Lord  Redesdale  et  al..  Hansard,  192 :  420-422. 

s  Hansard,  192 :  422. 

e  Railway  Times,  April  27,  1844. 


123]  REGULATION    OF   RAILWAY   STOCK-WATERING  123 

of  the  interest  so  charged,  without  any  corresponding  addition 
to  capital.  Although  the  magnitude  of  these  nominal  additions 
was  small,  the  effect  became  rather  objectionable.  So  in  1847, 
after  the  panic  which  followed  the  great  railway  extension,  the 
House  of  Lords  adopted  a  standing  order  7  prohibiting  the  pay- 
ment of  interest  out  of  capital.  This  was  done,  however,  not 
primarily  for  the  purpose  of  preventing  stock  watering,  but  to 
discourage  speculation.8  Nevertheless,  this  standing  order  had 
considerable  effect  upon  stock  watering,  and  remained  in  force 
for  many  years. 

This  restriction  was  again  emphasized  in  1864  in  connection 
with  the  loans  made  by  the  railway  companies.  In  the  Railways 
Construction  Facilities  Act  of  that  year  a  provision  was  made  to 
the  effect  that  railway  companies  should  not,  out  of  money 
raised  under  the  certificate  of  the  Board  of  Trade  by  calls  or 
borrowing,  pay  interest  or  dividend  to  a  shareholder  on  the 
amount  of  calls  made  on  his  shares.9 

For  twenty  years  these  restrictions  remained  in  force.  Prac- 
tically nothing  was  done  during  that  period  to  change  them. 
But  in  1882  on  behalf  of  the  small  undertakings,  which  were  in 
demand  at  that  time,  an  effort  was  made  to  obtain  from  Parlia- 
ment a  modification  of  these  restrictions.  The  reason  advanced 
was  that  the  payment  of  interest  out  of  capital  would  offer  a 
great  inducement  to  local  investors  and  small  capitalists,  who 
could  not  afford  to  put  their  money  into  these  undertakings  with- 
out obtaining  at  once  some  returns  upon  it.  While  the  effort 
was  unsuccessful,  it  brought  about  considerable  agitation,  as  a 
result  of  which  the  House  of  Lords  in  1886  modified  its  standing 
order  so  as  to  make  the  payment  of  interest  out  of  capital  per- 
missible under  certain  conditions.10  This  relaxation  of  the  law, 
however,  was  not  accompanied  with  such  good  results  as  was 
expected.  It  soon  proved  that  it  was  the  bright  prospects  of  the 
undertaking  and  not  the  power  of  the  company  to  pay  interest 
out  of  capital  that  could  induce  investors  to  come  forward.  So 
this  relaxation  of  the  indirect  check  against  stock  watering 

7  Standing  Order  No.  167. 

s  Report  of  Select  Committee,  May  19,  1882,  p.  iii. 

9  27  &  28  V.  c.  121,  sub-see.  3  of  section  29. 

10  According  to   Earl   Beauchamp  in  House  of  Lords,   Eailway   Times, 
March  16,  1889. 


124  RAILWAY   FINANCE   IN   ENGLAND  [124 

proved  to  be  ill-advised.  Since  then,  however,  special  provisions 
have  been  made  to  restrict  the  payment  of  interest  out  of  cap- 
ital. Thus  the  Coventry  Railway  Act  of  1910  provided  that  no 
interest  should  be  paid  on  any  share  until  at  least  two-thirds  of 
the  authorized  share  capital  had  been  accepted  by  bona  fide 
shareholders,  nor  should  interest  accrue  in  favor  of  any  share- 
holder when  calls  on  any  of  his  shares  were  in  arrears.  The  ag- 
gregate amount  to  be  paid  for  interest  was  also  limited  to  a 
definite  sum,  and  the  company  was  required  to  give  notice  of  its 
power  to  pay  such  interest  in  every  one  of  its  prospectuses,  ad- 
vertisements, or  other  documents  inviting  subscriptions,  so  that 
investors  might  know  what  might  take  place.  Moreover,  the 
borrowing  powers  of  the  company  should  be  reduced  to  the  ex- 
tent of  one-third  of  the  amount  paid  for  interest,  and  the  half- 
yearly  accounts  were  required  to  show  the  amount  of  capital  on 
which,  and  the  rate  at  which,  interest  had  been  paid.11 

Another  indirect  method  of  stock  watering  was  to  declare  un- 
earned dividends.  This  practice  was  quite  as  extensive  as  the  pay- 
ment of  interest  out  of  capital.  A  member  of  Parliament 12  was 
reported  to  have  said  that  many  railways  paid  dividends  out  of 
their  capital  stock  as  if  they  were  in  a  most  flourishing  condition ; 
and  that  they  sometimes  carried  the  practice  so  far  that  their 
capital  no  longer  existed.  This  practice  once  became  quite  alarm- 
ing ;  and  the  House  of  Commons  felt  itself  compelled  to  insert  a 
clause  in  the  Companies  Clauses  Act  of  1845  13  to  the  effect  that 
companies  should  not  declare  any  dividend  whereby  their  capital 
stock  would  be  in  any  degree  reduced.  By  the  Companies  Act 
of  1862,  it  was  also  provided  in  Table  A  that  no  dividends  should 
be  paid  except  out  of  profits  earned.  But  this  regulation  was 
not  compulsory  on  the  companies  registered  under  that  act,  for 
they  were  empowered  by  sec.  14  to  make  rules  of  association  ex- 
cluding the  regulation  in  Table  A.  Much  conflict  consequently 
resulted  between  the  application  of  this  act  and  the  enforcement 
of  Standing  Order  No.  167.1* 

But  some  railways  soon  found  another  method  of  adding  water 
to  their  capital  by  the  issuing  of  stocks  at  a  discount.  They  is- 

11  Sec.  41  of  the  Coventry  Railway  Bill,  1910. 

12  Lord  G.  Somerset.    Hansard,  78 :  48-49. 
is  8  V.  c.  16,  sec.  121. 

i*  Report  of  Select  Committee,  1882,  p.  iii. 


125]  REGULATION    OP    RAILWAY   STOCK-WATERING  125 

sued  stock  certificates  for  sums  larger  than  were  paid  into  the 
treasury  of  the  company.  This  practice  also  became  obnoxious, 
as  a  result  of  which  a  clause  was  inserted  in  the  Companies' 
Clauses  Act  of  1863,15  prohibiting  the  issue  of  any  shares  for  less 
than  the  full  amount. 

This  law  lasted  three  years.  Owing  to  the  agitation  of  the 
railway  interests  as  well  as  the  changeableness  of  the  attitude  of 
Parliament  in  railway  matters  during  the  period,  the  law  was 
amended  by  the  Railway  Companies  Act  of  1867,16  and  the  pro- 
vision prohibiting  the  issue  of  shares  at  a  discount  was  elim- 
inated. 

There  was  no  debate  upon  the  amendment  in  the  public  bill. 
But  the  question  regarding  railways  was  debated  in  connection 
with  the  proposal  made  in  the  Brighton  Railway  Bill.17  This 
company  (the  Brighton  Railway  Company)  being  very  much  in 
want  of  funds  proposed  to  raise  money  by  the  issue  of  prefer- 
ence stocks;  but  being  unable  to  raise  the  amount  required  by 
such  means,  they  sought  to  issue  ordinary  stocks  at  a  discount. 
The  proposal  was  regarded  by  the  lords  as  "perfectly  new"  and 
of  great  importance.  Lord  Redesdale,  who  recommended  the 
passage  of  the  bill,  confessed  that  it  was  an  objectionable  course, 
but  he  thought  that  "it  was  less  objectionable  than  the  creation 
of  preference  stocks,  and  he  therefore  felt  disposed,  under  the 
circumstances,  to  allow  the  company  to  issue  stocks  at  a  dis- 
count." None  of  the  lords  who  spoke  on  the  question  were  cer- 
tain as  to  the  advisability  of  such  a  measure;  but  with  the  feel- 
ing that  "when  a  railway  company  was  in  difficulty  it  was  the 
interest  of  all  parties  that  money  to  carry  it  through  should  be 
raised  in  some  way,"  they  did  not  oppose  the  measure  openly. 
Following  the  example  of  the  Brighton,  four  other  companies 
also  obtained  similar  powers,  and  £4,043,000  in  "water"  was 
added  in  that  year  to  the  railway  capital  by  the  issue  of  stocks 
at  a  discount,18 

By  the  amendment  of  1867  and  the  interpretations  given  to 
that  amendment  in  the  cases  just  cited,  it  was  generally  consid- 

is  26  &  27  V.  c.  118,  sec.  21. 
is  30  &  31  V.  c.  127,  sec.  27. 
"Hansard,  188:1423-1424  (July,  1867). 

is  The  Chatham  &  Dover,  the  Great  Eastern,  the  Sheffield,  and  the  Met- 
ropolitan. Fraser,  British  Eailways,  p.  54. 


126  RAILWAY   FINANCE   IN   ENGLAND  [126 

ered  that  the  issue  of  shares  at  a  discount  was  permitted.  This 
freedom  was  made  more  unmistakable  in  1869  by  the  Companies 
Clauses  Act  of  that  year,19  in  which  it  was  provided  that  the  re- 
peal of  the  proviso  against  the  issuing  of  stocks  at  a  discount 
was  made  applicable  generally  to  all  companies  coming  under 
that  act.  Thus  all  restrictions  were  removed.  The  railways  at 
once  made  use  of  this  relaxation  of  the  law;  and  the  issuing  of 
stocks  at  a  discount  soon  became  quite  general.20 

Although  these  discounts  were  ipso  facto  nominal  additions, 
they  were  comparatively  negligible  in  amount  and  were  done 
only  indirectly.  Open  stock  watering  was  still  under  the  ban  of 
law.  There  appeared,  however,  to  be  much  latitude  in  enforcing 
the  law  governing  such  nominal  additions.  Since  1867  many 
railway  companies  have  obtained  powers  to  "convert"  their 
stocks,  by  which  process  considerable  nominal  additions  were 
made.  But  in  most  of  these  cases  the  "infusion,"  as  it  was 
then  called,  was  still  small  compared  with  the  capital  of  the 
companies,  and  was  made  more  or  less  incidental  to  other  ar- 
rangements. Out  and  out  stock  watering  by  duplication  did  not 
take  place  until  1888,21  when  a  new  departure  took  place  under 
the  scheme  known  as  stock  splitting.  In  that  year  the  North 
British  Railway  was  authorized  to  make  an  "absolute  duplica- 
tion" of  its  existing  stock  of  £5,181,000.  By  this  so-called 
process  of  duplication,  every  holder  of  the  company's  ordinary 
stock  on  which,  say,  £100  had  been  paid,  was  given  a  certificate 
for  £200  in  the  converted  stock.  In  the  same  year  the  Great 
Northern  made  a  nominal  addition  of  £1,803,000,  and  in  the  fol- 
lowing year  the  Taff  Vale  obtained  powers  to  increase  its  ordi- 
nary capital  of  £1,300,000  two  and  a  half  times  by  the  same 
process.  The  latter  case  led  Parliament  to  make  its  first  inquiry 
into  stock  watering.  We  shall,  therefore,  examine  it  briefly. 

When  the  bill  of  the  Taff  Vale  for  triplicating  the  amount  of 

is  32  &  33  V.  c.  48,  sec.  5. 

20  Evidence  before  the  Select  Committee  of  1890  on  the  Conversion  of 
Railway  Stocks,  p.  39. 

21  Prior  to  1890  complete  information  regarding  the  amount  of  nominal 
addition  was  not  obtained  by  the  Board  of  Trade,  but  the  Board  of  Trade's 
returns  of  1890  show  a  total  of  £57,800,000.     Deducting  from  this  the  sum 
of  about  £21,000,000  added  in  1888,  1889  and  1890,  the  amount  of  nominal 
capital  existing  prior  to  1888  would  be  about  £37,000,000. 


127]  REGULATION    OF    RAILWAY    STOCK-WATERING  127 

its  ordinary  shares  was  lodged  in  Parliament,  it  aroused  consid- 
erable anxiety.  Therefore,  in  spite  of  the  fact  that  it  was  not 
the  duty  of  the  Board  of  Trade  to  examine  questions  dealing 
with  capital  in  railway  bills,  the  matter  was  brought  informally 
to  the  notice  of  that  board  for  consideration.  The  view  which 
that  board  took  on  the  question  was  that  the  proposed  nom- 
inal increase  was  so  extensive  that  it  ought  to  be  dealt  with 
in  a  public  manner,  and  should  not  be  allowed  to  pass  as  a  mat- 
ter of  course,  notwithstanding  their  general  opinion  that  the 
"greatest  freedom  should  be  permitted  to  companies  to  arrange 
their  capital  as  they  pleased."  Eventually  the  bill  was  passed 
and  ample  powers  of  duplication  were  granted  to  the  company, 
subject  to  the  provision  that  surplus  profits  above  15  per  cent 
on  the  ordinary  capital,  or  6  per  cent  on  the  new  enlarged  cap- 
ital, should  be  given  to  the  public  in  the  form  of  reduced  rates  or 
improved  accommodations.  It  was  also  provided  that  the  nature 
of  the  nominal  increase  as  well  as  the  old  capital  should  be 
shown  in  the  accounts  of  the  company,  so  that  every  one  should 
be  able  to  understand  what  had  happened.22 

Leaving  the  advisability  or  inadvisability  of  granting  powers 
for  stock  watering,  for  future  consideration,  we  may  here  men- 
tion the  erroneous  idea  which  Parliament  had  in  regard  to  rail- 
way finance  as  evidenced  by  the  proviso  under  which  the  ex- 
tensive powers  of  duplication  were  granted  to  the  Taff  Vale. 
Although  the  high  level  of  the  maximum  rate  of  dividend  fixed 
to  "balance"  the  favors  granted  might  have  been  warrantable 
at  the  time  by  the  special  circumstances  of  that  company,  the 
method  of  limiting  the  maximum  was  altogether  misleading  and 
ineffective.  According  to  that  method  any  surplus  above  15  per 
cent  etc.  was  to  be  given  to  the  public  in  the  form  of  reduced 
rates.  It  was  fairly  well  recognized  then,  as  it  has  been  gener- 
ally recognized  since,  that  a  railway  company  under  restriction 
as  to  the  maximum  rate  of  dividend  would  be  constantly  tempted 
to  increase  its  expenditures,  whenever  its  profit  promised  to  ex- 
ceed that  limit.23  There  are  always  many  ways  in  which  a  rail- 
way company  can  spend  money  before  it  will  give  it  to  the 

22  Evidence  before  the  Select  Committee  of  1890. 

23  "  To  forbid  a  corporation  to  increase  its  profits  is  to  encourage  waste 
and  discourage  enterprise."     Hadley,  Eailroad  Transportation,  1903,  p.  102. 


128  RAILWAY   FINANCE  IN   ENGLAND  [128 

public.  This  was  especially  true  during  that  period  when  the 
system  of  accounts  was  ineffective  to  check  up  the  expense 
charges  of  the  company. 

Then  again,  the  proviso  was  based  on  a  false  premise.  The 
maximum  was  fixed  at  15  per  cent  only  because  the  company 
had  been  declaring  an  average  dividend  at  that  rate  during  the 
previous  seven  years.  From  this  it  would  follow  that  a  company 
which  might  have  gone  on  the  principle  of  charging  high  or  dis- 
criminating rates  and  had  thus  been  enabled  to  pay  high  divi- 
dends would  have  its  maximum  fixed  at  a  high  point,  whereas  a 
company  that  had  been  content  with  moderate  rates  would  be 
punished  for  its  moderation  by  having  its  maximum  fixed  at  a 
low  level.24  It  is  needless  to  say  that  such  a  practice  would 
mean  gross  injustice. 

To  the  public  such  a  principle  would  also  be  unfair.  One  dis- 
trict would  be  given  a  right  to  receive  all  profits  above  say  5 
per  cent  of  dividend  of  the  railways  serving  it,  while  another 
district  would  not  be  entitled  to  enjoy  such  a  right  until  the  divi- 
dends of  its  railways  had  reached  say  10  or  15  per  cent.  But  the 
question  of  rates  is  not  within  the  scope  of  our  study*  Suffice  it 
to  say  that  strange  as  it  appeared  to  others,25  Parliament  at  the 
time  thought  it  had  gained  a  great  concession  from  the  railway 
by  the  provision  mentioned  and  referred  to  it  in  subsequent 
years  as  a  principle  to  be  followed  instead  of  regarding  it  as  a 
bad  practice  to  be  avoided. 

The  case  of  the  Taff  Vale,  significant  as  it  appeared  to  be, 
was  nevertheless  only  the  prelude  to  what  took  place  immediate- 
ly afterwards.  It  was  in  1890  that  stock  watering  reached  an 
extravagant  scope,  and  it  was  in  that  year  when  the  most  im- 
portant parliamentary  inquiry  regarding  stock  watering  was 
made.  In  1890  four  companies  26  lodged  bills  for  powers  to  add 

2*  "The  market  value  (of  railway  stocks)  depends  upon  the  rate  which 
has  been  charged.  .  ."  Interstate  Commerce  Commission  Report,  Feb. 
22,  1911,  p.  259. 

25  Economist,  March  22,  1890,  pp.  364-365. 

26  The  Isle  of  Wight,  the  London  &  South-Western,  the  Caledonian,  and 
the  Great  Northern.      The  London  &  South-Western  may  be  taken  as  a 
simple  and  typical  example  of  stock  duplication.     In  the  second  clause  of 
this  company's  bill  it  was  provided  that  the  company  would  create  ordinary 
stock  of  two  classes —  (1)  preferred  4  per  cent  ordinary  stock  and  (2)  de- 


129]  REGULATION    OF    RAILWAY   STOCK-WATERING  129 

some  £36,000,000  nominally  to  their  capital,  and  those  bills  were 
not  opposed.27  The  vast  interest  involved  in  these  proposals  at 
once  attracted  much  attention.  The  Board  of  Trade  in  spite  of 
its  policy  to  favor  non-intervention  in  such  matters,  thought  the 
question  of  such  an  extensive  increase  of  nominal  capital  to  be 
of  "novel  impression"  and  a  "new  departure  so  important  that 
it  ought  not  to  be  passed  sub  silentio  .  .  .,"  so  it  urged 
that  the  question  should  be  fully  debated  and  the  whole  matter 
thrashed  out.  The  chairman  of  the  Ways  and  Means  Commit- 
tee, under  whose  hands  such  unopposed  bills  were  usually  dis- 
posed of  without  much  discussion,  also  considered  that  the  vast 
interests  involved  in  them  required  special  investigation.  He 
disregarded,  therefore,  the  usual  rule  of  procedure,  and  handled 
those  bills  as  if  they  were  opposed.  Accordingly  they  were  re- 
ferred to  a  select  committee  of  nine  members,  five  being  nom- 
inated by  the  House  of  Commons  and  four  by  the  Committee  of 
Selection.28  This  select  committee  was  empowered  to  send  for 
persons,  papers,  and  records,  etc.,  concerning  both  sides  of  the 
question,  and  to  consider  what  provisions  should  be  made  for  the 
benefit  of  the  public,  if  the  applications  were  allowed.29 

Two  distinct  questions  at  once  presented  themselves  for  solu- 
tion, namely: 

(1)  Whether  or  not  the  proposed  duplication  of  stocks  ought 
to  receive  sanction. 

(2)  How  far  it  was  necessary  or  expedient  for  Parliament  to 
interfere  with  the  methods  by  which  the  duplication  was  done, 
and  if  Parliament  should  so  interfere,  whether  the  terms  and 

ferred  duplicated  ordinary  stock,  both  classes  of  which  to  be  in  substitu- 
tion of  a  corresponding  amount  of  the  paid  up  ordinary  deferred.  That  is 
to  say,  £100  of  the  preferred  and  £100  of  the  existing  ordinary  stock  should 
be  substituted  for  every  £100  of  the  existing  ordinary  stock.  It  was  also 
provided  that  the  maximum  dividend  on  the  preferred  stock  should  be  at  the 
rate  of  4  per  cent  non-cumulative,  and  that  the  remainder  of  the  net  profits 
would  go  to  the  deferred  ordinary  stock.  The  voting  powers  were  to  re- 
main as  before,  as  if  the  splitting  or  duplicating  had  not  taken  place.  Cf. 
Eailway  Times,  May  17,  1890,  and  testimony  of  the  representative  of  the 
L.  &  S.  W.  before  the  Select  Committee  of  that  year. 

27  Eailway  Times,  March  22,  1890,  and  June  21,  1890,  p.  784. 

28  Select  Committee  of  the  House  of  Commons  on  Stock  Conversion,  1890, 
hereafter  called  Select  Committee  of  1890. 

w  Report  of  Select  Committee,  1890,  p.  ii. 


130  RAILWAY   FINANCE   IN   ENGLAND  [130 

conditions  under  which  duplication  might  be  done  should  be 
prescribed  in  a  general  enabling  bill. 

With  these  questions  before  it,  the  committee,  besides  taking 
testimony  from  the  representatives  of  the  railways  and  other 
interested  parties,  called  for  much  independent  evidence,  among 
which  was  that  of  the  representatives  of  the  Board  of  Trade, 
the  Stock  Exchange  Committee,  and  of  prominent  members  of 
the  London  and  Scottish  banking  fraternity.  A  remarkable 
phalanx  of  opinion  was  obtained. 

One  very  striking  feature  of  the  evidence  on  the  question  of 
stock  watering  was  that  not  one  of  the  witnesses  thought  the 
practice  good  in  itself.  Even  those  who  appeared  in  behalf  of 
the  railways  did  not  attempt  to  justify  it  on  its  own  merits.  On 
the  other  hand,  all  the  witnesses  agreed  that  in  principle  stock 
watering  should  be  avoided.  But  the  railway  representatives 
claimed  that  if  the  practice  were  an  evil,  it  was  a  necessary  one, 
since  if  they  did  not  do  it  themselves,  the  conversion  companies 30 
were  going  to  do  it  for  them. 

The  second  question  upon  which  much  discussion  took  place 
was  how  to  ameliorate  this  necessary  evil.  What  was  elicited 
upon  this  question  was  enlightening.  The  Board  of  Trade31 
was  of  the  opinion  that  if  the  freedom  of  stock  watering  were  to 
be  generally  conceded,  it  was  most  important  that  they  should 
retain  a  record  of  the  actually  paid-up  capital  as  distinguished 
from  the  nominal  addition.  The  position  of  the  board  was  to 
leave  railway  shareholders  to  duplicate,  triplicate,  or  to  give  any 
name  or  units  to  their  capital,  for  the  purpose  of  buying  and  sell- 
ing, that  suited  them  best,  "but/'  they  said,  "let  us  take  care  of 
the  public  interest  so  far  as  the  record  is  concerned."  The 

so  The  first  stock  conversion  company  was  floated  in  February,  1889. 
The  object  of  the  company,  which  was  new  at  the  time,  was  to  effect  the 
duplication  or  triplication  of  the  stocks  of  railway  companies  independent 
of  the  railways  themselves.  The  conversion  company,  or  trust,  used  its  own 
capital  for  the  purchase  of  railway  stocks,  and  also  gave  its  own  shares  and 
debentures  in  exchange  for  any  railway  stocks  that  might  be  deposited  with 
it.  Thus,  it  obtained  a  considerable  amount  of  railway  stock,  which  in  turn 
was  made  the  basis  of  a  very  much  larger  issue  of  the  trust's  own  shares 
and  bonds.  For  details  of  the  working  of  the  conversion  company  see 
Economist,  1889,  p.  596. 

si  For  details  of  the  position  of  the  Board  of  Trade  see  Evidence  before 
the  Lords'  Committee  on  the  Conversion  of  Stock,  1890,  pp.  37-44. 


131]  REGULATION    OF    RAILWAY    STOCK-WATERING  131 

Board  of  Trade  was  also  of  the  opinion  that  there  should  be  uni- 
formity in  recording  these  nominal  additions.  If  no  special  act 
like  that  of  1868  were  enacted,  a  uniform  clause  requiring  such 
records  should  be  inserted  "as  far  as  possible"  in  all  private 
bills  asking  for  powers  to  make  nominal  additions.  It  also  pro- 
posed under  the  powers  of  obtaining  statistical  information  con- 
ferred by  the  Railway  and  Canal  Traffic  Act  of  1888  32  to  obtain 
and  record  the  same  information  in  the  annual  returns  under  the 
Regulation  of  Railways  Act  of  1871.33  Attention  must  be  called 
to  the  fact  that  the  purpose  of  the  Board  of  Trade  in  insisting 
upon  the  keeping  of  a  clear  record  of  the  original  paid-up  and 
the  nominal  capital  was  "mainly  in  the  interest  of  the  govern- 
ment and  the  public  with  reference  to  the  powers  with  which  the 
companies  have  been  entrusted,  and  not  for  the  purpose  of  bene- 
fiting or  shielding  the  investing  classes  in  any  way. ' f  34 

Whatever  the  purposes  were,  all  the  evidence  agreed  on  the 
necessity  of  keeping  a  clear  record  of  all  nominal  additions.  A 
practical  banker 35  in  testifying,  believed  that  to  keep  a  separate 
record  of  such  nominal  additions  was  very  important  not  only  to 
the  railway  companies  themselves  but  to  the  general  investors  as 
well.  The  chairman  of  the  stock  exchange  36  considered  it  very 
important  that  the  government  should  insist  upon  having  the 
original  capital  placed  on  the  face  of  the  accounts,  so  that  there 
should  be  no  doubt  as  to  what  was  the  real  paid-up  capital.  By 
this  means,  ' '  every  person  who  buys  or  sells  these  shares  will  al- 
ways have  before  him  every  six  months  what  his  position  is." 
In  short,  the  consensus  of  opinion  both  in  Parliament  as  well  as 
outside  of  it  was  that  a  clear,  separate  record  of  the  conversion 
and  the  converted  stocks  was  necessary  for  the  general  interest 
of  the  railways  and  the  public.  It  is  interesting  to  notice  that 
no  objection  whatever  against  this  requirement  was  raised  by  the 
railways. 

The  select  committee,  after  examining  those  witnesses  repre- 
senting different  interests,  made  a  special  report  three  months 

32  52  &  53  V.  c.  66,  sec.  32. 
ss  34  &  35  V.  c.  78. 

s* Evidence  before  the  Lords'  Committee  on  the  Conversion  of  Stock, 
1890,  p.  43. 

35  Ibid.,  pp.  53-56. 
se  Ibid.,  p.  47. 


132  RAILWAY   FINANCE   IN   ENGLAND  [132 

after  its  appointment.  As  above  stated,  the  committee  had  to 
decide  two  distinct  questions:  (1)  whether  the  proposed  nominal 
additions  ought  to  receive  the  sanction  of  Parliament,  and  (2) 
how  far  it  was  expedient  for  Parliament  to  interfere  with  the 
process  by  which  the  nominal  additions  were  to  be  effected.  In 
answer  to  the  first  question,  the  committee  said  that  there  was 
"nothing  unreasonable  or  objectionable  from  a  public  point  of 
view  in  the  conversion  of  ordinary  stocks  into  a  preferred  and  a 
deferred  class,"  and,  therefore,  it  recommended  "that  the  neces- 
sary power  for  that  purpose  should  not  be  refused  when  a  rail- 
way company  desires  it."  "With  regard  to  the  second  question, 
which  was  of  general  interest,  the  committee  instead  of  trying  to 
solve  it  as  it  was  expected,  dodged  it  by  throwing  the  responsi- 
bility upon  the  Royal  Commission  of  1867  which  stated  "that 
Parliament  should  relieve  itself  from  all  interference  with  the 
financial  affairs  of  railway  companies,  leaving  such  matters  to  be 
dealt  with  under  the  Joint  Stock  Companies  Act  .  .  ."  and 
the  committee  urged  "that  Parliament  should  continue  to  act 
upon  the  principle  of  non-intervention  .  .  .  believing  that 
while  the  public  are  naturally  concerned  in  the  solidity  and  sta- 
bility of  corporations  to  which  Parliament  has  given  large  ex- 
clusive powers,  these  objects  are,  in  most  cases,  best  secured  by 
trusting  to  the  self -interest  of  the  shareholders. "  37  In  order  to 
avoid  the  confusion  inherent  in  these  nominal  additions,  the 
committee  believed  "it  right  to  insist  (1)  that  the  dividend 
should  in  all  cases  continue  to  be  declared  on  the  original  stock, 
and  (2)  that  the  original  stock  or  paid-up  capital  shall  be  re- 
corded and  shown  in  the  accounts  as  though  no  alteration  had 
been  made,  .  .  ."  and  (3)  that  the  new  stock  should  bear  a 
different  and  uniform  nomenclature. 

This  report  proved,  as  might  have  been  expected,  disap- 
pointing to  many  parties,38  but  not  to  the  railway  companies. 
Throughout  its  length  it  showed  that  the  committee  took  for 
granted  the  very  matters  into  which  it  had  been  expected  to  in- 
quire. Most  of  its  conclusions  were  drawn  from  the  fact  that 
some  commission  said  so  and  so;  and  much  of  the  evidence 

37  Report,  pp.  IV- V. 

38  Both  the  Economist  and  the  Railway  Times  published  editorials  strong- 
ly criticising  the  report. 


133]  REGULATION    OF    RAILWAY    STOCK-WATERING  133 

seemed  to  have  been  disregarded.  In  the  first  place,  the  con- 
elusion  of  the  committee  that  "there  was  nothing  unreasonable 
or  objectionable  from  a  public  point  of  view  in  the  conversion  of 
ordinary  stocks  .  .  ."  did  not  seem  to  be  well  founded.  In 
the  face  of  the  numerous  objectionable  features  of  stock  water- 
ing brought  out  by  the  evidence,  no  one  could  have  expected  such 
a  conclusion. 

Then  the  statement  made  by  the  committee  that  the  estab- 
lished principle  was  that  Parliament  should  not  concern  itself 
any  more  with  the  financial  affairs  of  railways  than  with  those 
of  other  stock  companies  was  open  to  serious  question.  Parlia- 
ment had  never  assented  to  this  principle.  On  the  contrary  it 
had  never  permitted  railway  companies  to  deal  with  their  cap- 
ital accounts  with  the  same  degree  of  freedom  as  the  ordinary 
joint  stock  companies.  Numerous  facts  39  could  be  cited  to  show 
that  Parliament  had  drawn  a  clear  and  broad  line  of  demarca- 
tion between  the  principles  governing  the  finances  of  railway 
companies  which  enjoyed  a  state  conferred  monopoly  and  that 
of  ordinary  industrial  undertakings.  "To  assume,  therefore, 
that  Parliament  had  acted  on  the  principle  of  non-intervention 
in  the  financial  affairs  of  railway  companies  seemed  to  be  direct- 
ly opposed  to  facts. ' ' 40  Whether  the  principle  involved  in 
stock  watering  was  right  or  wrong,  it  was  certainly  not  to  be 
summarily  disposed  by  quoting  a  twenty-year  old  opinion  which 
Parliament  did  not  endorse  at  the  time  and  which  in  its  subse- 
quent actions  it  had  often  deliberately  set  aside. 

It  must  not  be  inferred  from  these  disappointing  features  that 
the  inquiry  of  the  committee  was  entirely  fruitless.  At  least  two 
of  the  recommendations  of  the  committee  have  since  proved  to  be 
sound.  The  first  was  that  regarding  the  keeping  of  a  clear  rec- 
ord of  all  nominal  additions  and  the  other  was  that  of  requiring 
a  uniform  and  distinct  nomenclature  to  be  put  on  the  face  of  the 
"watered"  stocks.  It  is  to  be  regretted,  however,  that  sound  as 
these  recommendations  were,  they  were  shorn  of  much  of  their 

39  Parliament  has  put  railway  finance  upon  a  different  footing  from  that 
of  other  companies  by  specially  authorizing  trustees  to  invest  in  certain 
classes  of  railway  stocks.  It  has  reserved  to  itself  the  power  to  deal  with 
the  affairs  of  an  insolvent  railway;  and  it  has  intervened  to  limit  railway 
dividends,  etc. 

<o  Economist,  June  21,  1890. 


134  RAILWAY   FINANCE   IN   ENGLAND  [134 

force  and  value  by  the  lack  of  emphasis  placed  upon  their  en- 
forcement. 

This  report  was  received  by  Parliament  on  June  13,  1890. 
No  general  or  special  legislation  resulted  from  the  inquiry.  But 
clauses  embodying  the  recommendations  of  the  committee  to  re- 
quire the  recording  of  all  nominal  additions  were  introduced 
into  the  bills  then  under  consideration.41  Moreover,  a  precedent 
was  established,  according  to  which  similar  clauses  have  con- 
tinued to  be  inserted  in  all  subsequent  bills  for  powers  to  make 
nominal  additions  to  railway  stock.  Parliament  also  occasion- 
ally required  that  dividends  be  paid  on  the  original  ordinary 
shares,  exclusive  of  the  nominal  additions,  as  in  the  case  of  the 
Midland,  where  it  was  provided  that  the  "company  shall,  not- 
withstanding the  conversion,  .  .  continue  to  ascertain  and 
declare  their  dividends  on  the  amount  of  ordinary  stock  which 
would  have  been  entitled  to  dividend  if  no  such  conversion  had 
taken  place.  .  . "  *2 

Parliament,  however,  failed  to  make  use  of  the  committee's 
recommendation  of  adopting  some  distinct  nomenclature  for  the 
converted  stocks.  Neither  was  any  uniform  method  of  procedure 
adopted  to  compel  all  railway  companies  to  report  their  nominal 
additions  to  stock.  An  indirect  but  more  effective  check  against 
stock  watering,  however,  was  adopted  in  the  following  year,  by 
the  enactment  of  the  Stamp  Act  in  which  it  was  provided  that  in 
case  of  any  nominal  increases  of  the  share  capital,  an  ad  valorem 
duty  of  2  shillings  per  £100  should  be  charged,  with  a  cumula- 
tive penalty  for  neglect  to  render  due  statement  of  such  in- 
creases. This  measure  has  been  rigorously  enforced.  Thus  the 
railway  companies  have  been  compelled  under  penalty  to  pay 
duty  on,  as  well  as  to  render  due  statements  of,  all  nominal  in- 
creases to  a  government  office.  It  may  be  added  that  a  further 
check  against  unnecessary  stock  watering  was  effected  by  a  sub- 
sequent enactment  in  which  the  stamp  duty  was  increased  from 
2  to  5  per  cent. 

In  this  way,  the  question  of  stock  watering  was  disposed  of, 
and  the  policy  for  its  regulation  settled  once  for  all.  No  new 

41  Eailway  Times,  June  14,  1890. 

42  Sec.  67  of  the  Midland  Act  of  1897,  quoted  in  Fraser,  British  Rail- 
ways, p.  68. 


135]  REGULATION    OF    RAILWAY   STOCK-WATERING  135 

departure  from  the  policy  has  since  been  made  by  Parliament. 
The  status  thus  established  may  be  summed  up  as  follows : 

(1)  Railway  companies  shall  have  freedom  to  determine  their 
policies   and   practice   in   making   nominal   additions   to    their 
capital. 

(2)  Before  such  nominal  additions  are  made,  the  company 
must  come  to  Parliament  for  power. 

(3)  Bills  for  such  powers  are  dealt  with  in  the  same  way  as 
any  other  kind  of  private  bill. 

(4)  Clauses  requiring  the  keeping  of  a  clear  record  of  all 
nominal  additions  as  distinguished  from  the  paid-up  capital  are 
uniformly  inserted  in  such  bills  before  their  passage. 

(5)  An  ad  valorem,  duty  of  5  per  cent  is  to  be  paid  on  the 
nominal  increases  and  a  due  statement  of  all  nominal  additions 
is  to  be  furnished  to  the  Stamp  Duty  Commissioners'  office. 

By  this  system  of  regulation,  complete  liberty  has  been  given 
to  the  companies  on  the  one  hand,  and  publicity  has  been  insured 
to  the  public  on  the  other.  Although  England  had  to  suffer  from 
her  leniency  toward  stock  watering,  she  has  never  known  those 
vicious  schemes  of  stock  watering  practiced  in  the  United  States. 
Thus,  disappointing  as  the  1890  investigation  and  imperfect  as 
the  action  of  Parliament  appeared  to  be,  much  good  was  brought 
about,  which  was,  perhaps,  due  both  to  the  efficacy  of  the  Eng- 
lish system  of  regulation  as  well  as  the  readiness  of  the  English 
railways  to  mitigate  as  far  as  possible  the  evils  inherent  in  stock 
watering. 

Following  the  suggestion  of  the  Select  Committee  of  1890,  the 
Board  of  Trade  in  preparing  its  railway  returns  for  1890  also 
endeavored  to  find  some  way  to  give  practical  effect  to  the  rec- 
ommendations in  regard  to  the  records  to  be  kept.  On  account 
of  the  lack  of  definite  power,  the  Board  of  Trade,  however,  had 
to  request  the  companies  to  show  in  their  semi-annual  returns 
the  amount  by  which  the  various  descriptions  of  their  stocks  and 
shares  had  been  nominally  increased  or  decreased.43  But  the 
"request"  of  the  Board  of  Trade,  though  not  as  effective  as  a 
command  might  have  been,  proved  quite  useful,  and  considerable 
information  regarding  nominal  additions  was  obtained  from  the 
companies  which  had  added  "water"  to  their  capital.  These 

43  General  Beport  to  Board  of  Trade  on  shares,  etc.,  1890,  p.  4. 


136 


RAILWAY   FINANCE  IN   ENGLAND 


[136 


figures  of  nominal  capital  have  since  been  published  by  the 
Board  of  Trade  from  year  to  year,44  to  the  advantage  of  the 
public  as  well  as  to  the  railways  themselves.  By  turning  to 
these  returns  one  may  at  once  see  for  himself  what  part  of  the 
company's  capital  represents  nominal  increases,  which  informa- 
tion is  an  advantage  in  itself  as  well  as  a  means  to  clarify  con- 
fusion and,  in  a  measure,  to  prevent  speculation  in  stocks. 

But,  as  remarked  before,  the  policy  of  freedom  in  stock  water- 
ing in  England  was  established;  and  the  aforesaid  indirect 
checks  against  this  practice  were  not  felt  seriously  in  some  cases. 
The  significance  of  this  policy  may  be  seen  from  the  following 
table  which  exhibits  the  development  of  stock  watering  in  Eng- 
land from  the  time  when  its  first  record  appeared  in  the  Board 
of  Trade  returns. 

NOMINAL  CAPITAL,   1890-1907.45 


Year 

Shares  and 
Stocks 
Million 
pounds 

Deben- 
tures 
Million 
pounds 

Total 

Proportion 
to  paid  up 
capital 
Per  cent 

Nominal 
Increase 
during  year 
Million 
pounds 

Real 
Increase 
during  year 
Million 
pounds 

1890 

49.3 

8.5 

57.8 

6.4 

6.0 

14.9 

1891 

64.1 

7.0 

7.0 

14.8 

1892 

53.7 

15.0 

68.1 

7.2 

4.0 

20.9 

1893 

53.7 

24.4 

78.1 

8.0 

10.0 

17.0 

1894 

54.2 

26.8 

81.0 

8.2 

3.0 

11.1 

1895 

56.7 

31.8 

88.5 

8.8 

7.5 

8.2 

1896 

68.9 

37.4 

106.3 

10.1 

17.8 

10.6 

1897 

114.5 

38.0 

152.5 

14.0 

46.2 

14.1 

1898 

139.8 

43.7 

183.5 

16.1 

31.0 

13.7 

1899 

141.0 

43.8 

184.8 

16.0 

1.3 

16.5 

1900 

142.7 

44.2 

186.9 

16.0 

2.1 

21.6 

1901 

143.7 

43.7 

187.4 

15.8 

.5 

19.0 

1902 

145.7 

43.7 

189.4 

15.7 

2.0 

19.4 

1903 

147.5 

43.7 

191.2 

15.6 

1.8 

16.8 

1904 

149.2 

44.3 

193.5 

15.4 

2.3 

20.5 

1905 

150.0 

44.3 

194.3 

15.4 

.8 

13.5 

1906 

151.0 

44.3 

195.3 

15.2 

1.0 

13.3 

1907 

151.5 

44.4 

195.9 

15.0 

.6 

6.6 

44  In  the  Board  of  Trade  Annual  Eeturns  showing  the  authorized  and 
paid  up  share  and  loan  capital  of  the  railway  companies,  the  amounts  by 

45  The  figures  in  the  table  are  obtained  from  the  annual  Railway  returns 


137]  REGULATION    OF    RAILWAY    STOCK- WATERING  137 

From  this  table,  it  may  be  seen  that  at  the  time  when  the  par- 
liamentary inquiry  was  made,  £57,800,000  46  or  about  six  per 
cent  of  the  total  paid-up  railway  capital  in  the  United  Kingdom 
represented  nominal  additions.  This  equaled  about  £3,000  per 
mile  of  line  opened.  The  effect  of  the  attitude  of  Parliament 
and  the  Select  Committee  of  1890  may  be  seen  from  what  hap- 
pened during  the  subsequent  eight  years,  when  an  average  of 
£16,000,000  in  " water"  was  added  annually.  In  1895  the  nom- 
inal addition  made  was  as  large  as  the  real  increase  in  capital; 
in  1896  it  was  about  twice  as  much  and  in  1897  it  reached  the 
enormous  proportion  of  £46,200,000  which  was  more  than  three 
times  as  much  as  the  increase  of  real  capital  made  during  that 
year.  This  shows  how  extensively  stock  watering  was  practiced 
during  that  period.  On  account  of  the  encouragement  given  by 
the  findings  of  the  Select  Committee  of  1890  the  railways  ap- 
peared to  have  thought  that  there  was  a  "gold  mine"  in  stock 
watering,  and  plunged  into  its  depth.  Thus  by  a  stroke  of  the 
pen,  so  to  speak,  the  amount  of  the  stocks  of  a  number  of  com- 
panies was  doubled  or  trebled,  without  adding  anything  materi- 
ally to  their  properties.  The  significance  of  such  extensive  and 
violent  manipulations  can  hardly  be  overestimated.  When  over 
16  per  cent  of  the  paid-up  capital  represents  "water,"  and 

which  the  capital  of  each  railway  company  has  been  nominally  increased  by 
the  conversion,  consolidation,  and  division  of  their  stocks,  are  shown  with 
figures  in  italics  under  the  figures  of  the  total  capital  of  each  company. 
There  is  also  a  separate  table  showing,  in  abstract,  the  nominal  increases  of 
each  individual  company  as  well  as  the  whole  system.  The  returns,  how- 
ever, contain  no  information  as  to  the  difference  between  the  nominal 
amount  and  the  amount  actually  received  of  the  stocks  which  have  been 
issued  at  a  premium  or  at  a  discount. 

of  the  Board  of  Trade  and  the  percentages  are  calculated  with  a  slide-rule. 
They  represent  the  United  Kingdom,  but  the  amount  for  England  and 
Wales  is  about  75-80  per  cent  in  almost  every  case. 

The  nominal  increases  due  to  discount  on  issue,  payment  of  dividends 
out  of  capital  stock,  are  not  included  in  the  figures  of  column  of  ' '  Nominal 
increase  during  year. ' ' 

46  Of  this  amount,  £6,000,000  was  due  to  the  conversions  made  by  the 
Midland  which  has  been  by  far  the  most  important  company  in  stock  water- 
ing. This  company  has  about  £41,000,000  of  its  nominal  capital  represent- 
ing water. 


138  RAILWAY   FINANCE  IN   ENGLAND  [138 

when  nominal  additions  made  in  a  year  become  three  times  as 
big  as  the  increase  of  real  capital,  we  have  something  that  is  at 
once  important.  It  becomes  hard  to  agree  with  the  Select  Com- 
mittee of  1890  that  such  stock  manipulations  as  these  made  no 
difference  whatever  to  the  public. 

Another  peculiar  feature  of  the  English  practice  of  stock 
watering  is  that  "water"  is  added  not  only  to  the  shares  and 
stocks  but  to  the  debenture  debts  as  well,47  and  that  the  nominal 
additions  to  these  debts,  as  shown  in  the  preceding  table,  repre- 
sent a  considerable  proportion  of  the  total  amount  of  "water." 

But  stock  watering  reached  its  zenith  in  1897,  and  its  decline 
has  been  more  striking  than  its  growth.  In  1898  the  annual  in- 
crease declined  to  £31,000,000,  and  in  the  following  year,  it 
dwindled  to  the  insignificant  figure  of  a  little  over  a  million 
pounds.  Ever  since  that  time  the  annual  increase  has  never 
been  more  than  £2,300,000,  and  the  practice  has  continued  to  de- 
cline until  it  reached  the  negligible  proportion  of  only  about 
half  a  million  in  1907. 

The  course  of  these  annual  increases  may  be  seen  more  clearly 
by  the  help  of  the  following  diagram.  In  the  first  place,  it  may 
be  noticed  that  the  annual  increases  of  nominal  capital  from 
1890  to  1895  were  about  equal.  The  curve  suddenly  commenced 
to  rise  in  1896,  it  reached  the  highest  point  in  1897,  it  com- 
menced to  fall  in  1898,  and  it  reached  a  very  low  point  in  1899. 

This  course  is  especially  interesting  when  studied  with  the 
curve  showing  the  increases  of  real  capital  during  the  same 
period.  Before  1895  the  "real  increase"  curve  always  stays 
above  the  "nominal  increase"  curve.  During  the  following 
four  years  the  latter  rises  above  the  former  by  an  enormous 
margin;  and  since  1899  the  "nominal"  curve  remains  consider- 
ably below  the  "real"  curve.  Then  the  curve  showing  the  real 
increases  does  not  have  any  such  violent  and  abrupt  changes  as 
that  showing  the  nominal  increases. 

These  facts  also  reveal  that  there  is  some  truth  in  the  principle 
which  had  a  great  influence  upon  the  English  legislators  that 

47  The  watering  of  the  debenture  debts  has  been  done  usually  by  giving  a 
new  certificate  for  a  debt  of  say  £200  at  2  per  cent  for  a  former  and  actual 
debt  of  £100  at  or  above  4  per  cent  per  annum  for  either  the  purpose  of 
making  the  security  more  attractive  or  that  of  reducing  the  rate  of  interest. 


139] 


REGULATION    OF    RAILWAY    STOCK-WATERING 


139 


yv 


f«   »/    1*   13    f*  tf  n    IT   n   tt  it**  01    ft    ei  tn  *f  it,  or 

///)€  represent  />o/r?ff>a/  fncrtascs 


represfn/s  acfifa/  add/  f  was  £f  tqtrfa 


railway  shareholders  would  generally  find  out  for  themselves 
what  is  good  or  bad,  though  sometimes  after  much  loss,  and  to  a 
certain  extent  explain  why  Parliament  has  been  so  lenient  in  the 
regulation  of  stock  watering.  But  even  this  self-conviction  of 
the  railways  could  not  right  what  was  wrong.  While  the  indi- 
vidual roads  had  to  suffer  enormous  financial  losses  in  the  pay- 
ment of  stamp  duties  and  litigation  penalties,  the  whole  system 
also  could  not  escape  from  the  disastrous  confusion  created  in 
the  minds  of  the  public.  In  spite  of  the  far-sightedness  and 
moderation  of  most  of  the  English  railways  in  stock  watering, 
today  about  £200,000,000,  or  about  $44,000  per  mile  of  line  48 
still  encumbers  the  English  railway  capital,  to  say  nothing  of 
the  unrecorded  nominal  additions,  all  of  which  serves  to  add 
more  confusion  and  uncertainty  to  the  complicated  questions  of 
railway  finance. 

This  leads  us  to  ask  why  stock  watering  came  into  vogue  and 

48  The  mileage  of  the  United  Kingdom  given  in  the  'Board  of  Trade  re- 
turns for  1908  was  12,845,  including  double  track,  and  10,263  miles  not  in- 
cluding second  and  third  tracks. 


140  RAILWAY   FINANCE  IN   ENGLAND  [140 

what  were  the  underlying  notions  regarding  it.  First  of  all,  it 
must  be  remembered  that  stock  watering  has  practically  never 
been  defended  on  its  own  merits.  Nothing  was  elicited  from 
the  inquiry  of  1890,  which  was  by  far  the  most  important  of  its 
kind,  to  justify  the  practice.  Bankers  and  large  merchants  re- 
gretted the  necessity  of  stock  watering,  and  many  railway  of- 
ficials were  opposed  to  the  practice.  In  short,  all  seemed  to 
agree  that  stock  watering  was  an  evil,  because  it  was  nothing  but 
a  pure  case  of  misrepresenting  actual  facts.  It  was  advocated 
not  as  anything  good  in  itself,  but  as  a  measure  of  self-defense 
against  the  operations  of  the  stock  conversion  and  investment 
companies.  As  the.se  conversion  companies  had  achieved  some 
apparent  success  in  securing  and .  duplicating  large  blocks  of 
railway  stocks,  the  railway  directors  made  their  plea  for  powers 
to  follow  the  example  of  the  conversion  companies.  Their  reason 
was  that  there  might  be  danger  to  the  properties  if  large  blocks 
of  their  stocks  were  merged  in  successive  trusts.  If  such  dupli- 
cations were  a  necessary  evil,  it  was  better  that  they  should  be 
effected  by  the  railways  themselves  rather  than  by  certain  irre- 
sponsible conversion  companies,  which  were  making  it  a  business 
to  effect  such  duplications  for  speculative  purposes.  Besides 
other  objectionable  features,  the  special  danger  apprehended 
from  the  operation  of  the  conversion  companies  was  that  as  hold- 
ers of  large  blocks  of  stock  they  would  possess  a  voting  power 
which  might  be  used  to  thwart  the  policy  of  the  directors  con- 
ceived in  the  best  interest  of  the  company. 

There  appeared  to  be  considerable  justification  for  this  appre- 
hension. But  it  must  be  noticed  that  the  argument  of  the  rail- 
way companies  postulated  that  the  operations  of  the  conversion 
company  had  already  proved  such  a  financial  success  that  share- 
holders had  a  strong  inducement  to  avail  themselves  of  them. 
This,  however,  was  not  exactly  the  case.  Take  the  London  & 
South-Western  as  an  example,  we  find  the  price  of  the  com- 
pany's ordinary  stock  in  May,  1889,  when  the  scheme  of  the  con- 
version company  was  first  put  into  operation,  was  £180.  At  this 
price,  £3,000  would  have  bought  £1,666  of  stock.  The  latter 
amount  of  stock  sold  at  the  price  of  £179,  which  prevailed  at  the 


141] 


REGULATION    OP    RAILWAY   STOCK- WATERING 


141 


time  49  when  the  company  lodged  its  bill  for  duplication,  would 
have  realized  £2,970.  On  the  other  hand,  if  an  investment  of  a 
similar  amount  were  made  in  the  stocks  of  the  conversion  com- 
pany which  operated  on  the  London  &  South- Western  stocks, 
the  result  would  have  been  as  follows : 50 


Amount 

Invested 

Stock 

£ 

1,000 

1st    pref  'd 

1,000 

2nd       " 

1,000 

Deferred 

Issue  Price      Amount 
May,  1889    Purchased 

£ 

100  1,000 

104  962 

39  2,562 


Price  in       Market  Value 
May,  1890       May,  1890 

£ 

99.5  995 

101.0  972 

36.0  923 


3,000 


2,890 


From  these  figures  it  may  be  seen  that  the  duplication  process 
as  carried  out  by  the  conversion  company  did  not  work  out  to 
the  advantage  of  those  who  invested  in  its  securities  in  prefer- 
ence to  investing  directly  in  the  railway  stocks.  "While  the  in- 
vestor who  put  £3,000  into  the  ordinary  stock  of  the  London  & 
South-Western  in  May,  1889,  got  a  security  which  was  worth 
£2,970  a  year  later  when  the  company  wanted  to  duplicate  its 
stocks,  the  person  who  invested  the  same  amount  of  money  in  the 
stocks  of  the  conversion  company  which  represented  the  London 
&  South- Western  stocks,  had  securities  which  were  worth  only 
£2,890.  In  other  words,  the  investor  who  availed  himself  of  the 
agency  of  the  conversion  company  had  lost  £80  more  on  the  cap- 
ital value  of  his  £3,000  investment  than  he  would  have  lost  had 
he  bought  the  railway  stock  itself.  In  addition  he  had  to  suffer 
loss  by  paying  to  the  conversion  company  as  commission  one- 
eighth  of  whatever  annual  dividend  he  received.  If  the  Cale- 
donian stocks  were  analyzed,  similar  results  would  be  obtained. 
Therefore,  the  assumption  that  the  duplication  or  triplication  of 
railway  stocks  by  the  conversion  companies  had  become  so  at- 
tractive to  investors  as  to  necessitate  the  adoption  of  the  same 
process  by  the  railways  seems  to  be  erroneous. 

It  was,  howrever,  generally  recognized  that  the  conversion  com- 
panies by  manipulation  might  exercise  some  baleful  influence 

49  May,  1890. 

so  Economist,  May  17,  1890,  p.  618. 


142  RAILWAY   FINANCE   IN   ENGLAND  [142 

and  interfere  with  the  voting  power  of  the  railway  companies. 
Stock  watering,  however,  did  not  appear  to  be  the  real  remedy, 
for  the  railway  companies,  as  was  then  recognized,51  could  never 
have  hoped  to  keep  pace  with  the  conversion  companies  in  the 
matter  of  stock  manipulations.  Furthermore,  even  if  the  railways 
could  have  manipulated  their  stocks  as  rapidly  as  the  conversion 
companies,  it  was  no  reason  why  they  should  be  induced  to  join 
the  gambling  ranks  of  the  conversion  companies.  Both  the  Rail- 
way Times  and  the  Economist 52  strongly  criticised  the  partici- 
pation in  it  by  the  railway  companies. 

The  foregoing  was  the  principal  reason  given  by  the  railway 
representatives  before  the  Select  Committee  of  1890  in  advocat- 
ing stock  watering.  But,  the  reasons  emphasized  within  the 
walls  of  the  committee  rooms  are  often  different  from  those 
emphasized  without.  The  case  in  1890  seemed  to  be  no  excep- 
tion. For  in  the  report  of  the  Isle  of  Wight  Railway 53  we  find 
the  only  reason  given  by  the  directors  of  that  company  to  their 
shareholders  in  advocating  the  duplication  of  stocks  was  that  the 
process  would  "  (1)  increase  the  capital  value  of  the  debenture 
stocks.  .  .  (2)  It  will  benefit  the  ordinary  stock-holders,  be- 
cause experience  has  abundantly  shown  that  preferred  and  de- 
ferred stocks  .  .  .  are  together  more  valuable  than  one  or- 
dinary stock.  (3)  It  will  benefit  the  preference  stockholders" 
by  making  their  securities  more  negotiable,  and  so  forth.  These 
might  not  have  been  the  only  reasons  in  every  case  but  they 
seemed  to  be  the  most  important  ones  why  the  railway  compan- 
ies wanted  to  ''water"  their  stocks.  Thus  it  was  not  the  fear 
of  the  conversion  companies,  as  emphasized  by  the  railway  rep- 
resentatives before  the  Select  Committee  that  led  to  the  watering 
of  stocks,  but  the  hope  of  pecuniary  gains. 

There  was  no  doubt  that  the  railway  directors  had  some  rea- 
son for  believing  that  stock  watering  would  make  the  securities 
more  valuable.  It  must  also  be  admitted  that  some  companies 
had  made  some  apparent  gains  from  the  operation.  But,  as  we 
have  shown,  such  gains  were  by  no  means  always  the  rule.  On 

51  Railway  Times,  April  26,  1890,  p.  541. 

52  Economist,  May  7,  1890,  p.  619. 

ss  Eailway  Times,  March  1,  1890,  p.  304. 


143]  REGULATION    OF    RAILWAY   STOCK-WATERING  143 

the  contrary  actual  losses  have  been  suffered  from  such  manip- 
ulations in  some  cases.  Moreover,  even  if  by  stock  watering  the 
prices  of  railway  securities  were  inflated,  as  was  expected,  such 
temporary  gains  of  the  existing  investors  would  only  mean  a 
corresponding  loss  to  the  investors  who  came  afterwards.  In- 
deed, as  the  Railway  Times  maintained,54  those  who  looked  to 
the  future  must  have  entertained  grave  misgivings  as  to  the 
wisdom  and  even  the  honesty  of  the  financial  legerdemain  in- 
volved in  stock-watering.  It  is  hardly  conceivable  that  the 
change  of  the  names  of  securities  could  create  any  lasting  and 
real  advantage  to  the  general  investor  without  a  corresponding 
loss  to  some  others. 

The  reason  given  by  the  Board  of  Trade 55  for  permitting 
stock  watering  is  especially  worth  noticing.  That  department 
shared  "the  common  feeling  rather  against  a  watering  of  cap- 
ital, ' '  but,  as  said  one  of  its  officers,  if  the  railway  shareholders 
desired  it,  I  would  "incline  to  think  .  .  .  it  is  rather  cov- 
ered by  the  general  idea  that  they  should  be  allowed  to  do  what 
they  please.  .  ." 

One  may  see  plainly  that  the  opinion  of  the  Board  of  Trade 
was  a  negative  one.  It  was  one  of  suspense.  They  advocated 
that  Parliament  should  permit  stock  watering  not  at  all  because 
they  thought  stock  watering  was  good,  but  because  they  thought 
non-intervention  was  their  policy,  and  hence,  they  must  follow  it. 

The  immediate  effect  of  stock  watering  in  England  has  been 
unmistakably  bad.  In  the  first  place,  this  process  has  unneces- 
sarily added  treacherous  elements  of  speculation  in  railway  fi- 
nance, in  turn  the  cause  of  much  disastrous  fluctuations  in  rail- 
way stocks,  especially  the  "adulterated"  classes.  Genuine  in- 
vestors have  been  victimized.  Many  people  have  sustained  dis- 
astrous and  irretrievable  loss  from  the  practice.56 

Moreover,  the  process  of  stock  watering,  as  was  prophesied  at 
the  time,57  has  conclusively  proved  to  be  not  only  unproductive 
of  any  real  advantage,  but  delusive,  as  shown  by  the  fact  that 

5*  Eailway  Times,  April  24,  1890,  p.  541. 

55  Evidence  before  Select  Committee  of  1890,  pp.  42-43. 

ss  Fraser,  British  Eailways,  p.  109. 

57  Eailway  Times,  April  26,  1890,  p.  41. 


144  RAILWAY   FINANCE  IN   ENGLAND  [144 

"The  subsequent  balance-sheets  can  hardly  show  the  true  posi- 
tion of  the  undertaking  with  so  much  water  added. "  58  In  spite 
of  the  efforts  of  the  Board  of  Trade  to  set  forth  clearly  the 
nominal  additions  of  each  company,  stock  watering  is  largely 
responsible  for  the  subsequent  misconception  of  many  people 
regarding  the  true  nature  and  extent  of  railway  capital  in  Eng- 
land. It  is  hard  to  tell  exactly  how  much  harm  these  nominal 
additions  have  done,  but  it  is  certain  that  they  have  contributed 
their  part  to  delude  future  generations  into  the  belief  that  the 
English  railway  system  has  cost  a  great  deal  more  than  it  really 
has.  And  this  delusion  has  undoubtedly  done  more  harm  than 
good.  Fictitious  capital  has  long  been  recognized  as  a  real  evil 
in  railway  finance,59  and  stock  watering  has,  perhaps,  created 
more  fictitious  capital  than  any  other  known  process. 

The  effect  of  stock  watering  upon  the  general  investing  public 
is  of  even  greater  consequence.  The  creation  of  so  many  nomen- 
clatures for  the  "watered"  stocks  at  once  caused  much  incon- 
venience to  the  holders  of  existing  stocks.  As  was  expected,  the 
misrepresentation  of  actual  facts  by  this  process  brought  about 
much  confusion.  The  numerous  descriptions  of  stocks  which  had 
been  already  complicated  enough  were  made  altogether  beyond 
the  comprehension  of  any  ordinary  investor.60  The  public  was 
puzzled  as  to  the  value  of  such  securities.  The  stockholder  could 
not  know  exactly  what  was  the  real  position  or  status  of  his  in- 
vestment ;  the  new  investor  was  unable  to  tell  the  value  of  what 
he  was  buying.  As  the  readiness  of  an  average  man  to  invest 
varies  directly  with  his  knowledge  of  the  steadiness  and  true 
value  of  the  securities,  these  new  elements  of  uncertainty  have 
unquestionably  frightened  away  many  investors  who  would  have 
come  forward  otherwise. 

Abstractly  considered,  stock  watering  is  also  objectionable. 
It  cannot  but  work  to  the  disadvantage  of  the  general  public.  A 
company  with  an  inflated  capital  account  is  usually  under  pres- 

ss  McDermott,  Railways,  p.  164. 

59  London  Times,  May  15,  1866. 

60  The  best  known  varieties  of  ordinary  stock  are  those  known  as  ordi- 
nary, as  preferred  and  deferred  ordinary,  as  preferred  and  deferred  con- 
verted ordinary,  besides  consolidated  "A"  and  "B"  ordinary  stock  and 
"consols."     See  J.  Fraser,  British  Railways,  p.  65. 


145]  REGULATION    OP    RAILWAY    STOCK-WATERING  145 

sure  to  "wring"  big  profits  out  of  its  customers  so  as  to  pay 
dividends  on  its  fictitious  as  well  as  real  capital. 

Again,  stock  watering,  as  President  Hadley  said,  has  been  re- 
sorted to  in  order  to  furnish  an  excuse  for  paying  higher  divi- 
dends than  the  law  or  public  sentiment  would  otherwise  permit,61 
Indeed  an  English  writer  claimed  that  one  reason  for  the  adop- 
tion of  stock  watering  in  England  was  that  the  nominal  reduc- 
tion of  dividends  would  render  the  companies  concerned  less 
liable  to  attack  on  the  ground  of  excessive  profits.62 

Moreover,  it  is  generally  recognized  that  the  "watered"  stocks 
of  a  railway  company  usually  have  some  baleful  effects  upon  the 
wages  which  it  pays  and  the  rates  which  it  charges.  The  com- 
pany with  a  large  capital  and  consequently  a  low  rate  of  divi- 
dend certainly  has  a  more  plausible  reason  for  opposing  the  pay- 
ment of  higher  wages  to  its  employees  as  well  as  for  objecting  to 
any  reduction  of  its  charges  than  it  would  have  otherwise.  Al- 
though the  actual  relation  between  capital  and  railway  rates  is 
unsettled  there  is  hardly  any  question  that,  other  things  being 
equal,  a  company  with  a  low  rate  of  dividend  is  less  liable  to 
have  its  charges  reduced  by  the  government  than  it  would  be  if 
its  rate  of  dividends  were  high. 

Furthermore,  stock  watering  seems  to  have  been  one  of  the 
worst  causes  in  giving  rise  to  speculation,  and  sometimes,  to 
fraudulent  manipulations,  both  of  which  results  have  been  re- 
sponsible in  making  railway  securities  a  much  less  reliable  form 
of  investment  than  they  might  have  been.63  The  best  managed 
companies  have  either  been  cautious  or  have  never  attempted  to 
indulge  in  stock  watering.  It  is  the  promoter  and  the  speculator 
who  find  opportunities  in  this  practice.  It  is  to  the  advantage 
of  the  general  investing  public  and  the  responsible  railway  direc- 
tor to  avoid  this  practice.  Indeed,  the  phrase  of  stock  watering 
is  still  altogether  indefinable,  and  the  evil  effects  of  stock  water- 
ing have  been  recognized  in  the  United  States  as  well  as  in 
England.64 

61  Hadley,  Railroad  Transportation,  1903,  p.  55. 

62  E.  B.  McDermott,  Eailways,  p.  164. 

63  E.  R.  Johnson,  Am.  Railway  Transportation,  1907,  p.  94. 

64  Of  the  nine  witnesses  who  testified  before  the  U.  S.  Industrial  Com- 


146  RAILWAY   FINANCE  IN   ENGLAND  [146 

The  principle,  or  rather  the  lack  of  principle,  involved  in 
stock  watering  "is  to  be  deprecated."  65  It  is  "opposed  to  con- 
servative railroad  financiering;"66  it  gives  rise  to  objectionable 
speculation  and  gambling,67  it  leads  to  pursuing  a  short  sighted 
policy ; 68  it  should  be  ' ' emphatically  condemned ; "  69  it  "is  a 
practice  against  which  Parliament  should  have  resolutely  set  its 
face."70 

Thus,  from  all  the  evidences,  statistics,  and  authorities  consult- 
ed and  after  examining  the  principal  reasons  given  by  various 
parties,  we  are  led  to  conclude  that  stock  watering  in  railway 
finance  is  objectionable. 

Now  what  shall  be  the  remedies  ?  No  general  rule  can  be  laid 
down  for  all  countries,  nor,  perhaps,  could  any  be  laid  down  for 
the  same  country  for  all  times.  Any  empirical  formula  or  dog- 
matic doctrine  is  liable  to  be  useless,  or  even  harmful.  But  tak- 
ing England  as  an  example,  it  seems  that  more  strict  rules  were 
warranted  and  could  have  been  adopted  for  the  regulation  of 
railway  stock  watering.  Even  at  the  time  when  the  practice  was 
most  vigorously  advocated,  there  did  not  appear  to  be  much  ob- 
jection against  more  stringent  measures  than  those  adopted  by 
Parliament.  The  only  excuse  we  find  for  the  attitude  of  the 
select  committee  of  1890  and  the  legislature  in  giving  much  free- 
dom to  stock  watering  was  that  the  established  principle  seemed 
to  be  non-intervention.  It  is  hardly  necessary  to  emphasize  that 
to  fall  back  always  on  old  principles  in  order  to  solve  new  prob- 
lems is  a  dangerous  policy.  Even  the  English  people  are  op- 
posed to  all  kinds  of  government  interference,  it  seems  that  Par- 
liament could  have  done  more  to  safeguard  the  public  interest. 
If  nothing  else,  it  certainly  could  have  required  the  appearance 

mission  of  1900  in  regard  to  stock  watering,  every  one  was  of  the  opinion 
that  the  practice  was  harmful.  Chief  among  these  witnesses  were  Profes- 
sors Seligman,  Johnson  and  Newcomb.  U.  S.  Industrial  Commission  Eeport, 
1900  V,  IV,  pp.  25  et  seq. 

65  E.  E.  McDermott,  Eailways,  p.  164. 

66  E.  E.  Johnson,  Am.  Railway  Transportation,  1907,  p.  90. 

67  Railway  Times,  April  26,  1890,  p.  541. 
es  Hadley,  p.  22. 

69  The  Economist,  Feb.  9,  1889,  p.  172. 
TO  Ibid.,  July  13,  1889,  p.  891. 


147]  REGULATION    OF    RAILWAY   STOCK-WATERING  147 

of  uniform  nomenclature  on  the  face  of  the  converted  stocks  as 
recommended  by  the  select  committee.  It  could  have  enacted 
some  law  to  enable  the  Board  of  Trade  to  compel  instead  of  to  re- 
quest the  companies  to  furnish  returns  showing  the  nominal  ad- 
ditions as  distinguished  from  the  actual  capital;  and  it  could 
have  enacted  a  general  law  so  as  to  insure  uniformity  in  the 
whole  matter,  instead  of  leaving  it  to  be  dealt  with  piecemeal. 

On  the  other  hand,  we  must  not  criticise  the  English  Parlia- 
ment according  to  our  understanding  of  what  stock  watering 
means  in  the  United  States.  In  the  first  place,  the  "worst  forms 
of  stock  watering,  unhappily  so  common  in  America  ...  is 
practically  unknown  in  England. "  n  If  at  all,  stock  watering 
must  be  done  openly.  It  must  be  sanctioned  by  Parliament. 
Such  publicity  removes  much  of  the  temptation  to  effect  stock 
watering  for  dishonest  purposes.  Moreover,  the  indirect  checks 
imposed  by  the  Stamp  Acts  have  made  stock  watering  quite  diffi- 
cult. Let  stock  watering  be  done  openly  and  be  investigated  first 
by  some  dignified  government  office,  it  will  disappear  on  its  own 
merits.  Therefore,  stock  watering  in  England,  extensive  as  it  is, 
has  never  been  nearly  as  objectionable  as  in  some  other  countries. 
Moreover,  the  English  railways  seem  to  have  seldom  if  ever, 
"watered"  their  stocks  for  dishonest  purposes.  They  also  ap- 
pear to  have  been  eager  to  help  the  government  to  prevent  the 
difficulties  inherent  in  stock  watering.  Hence  a  request  of  the 
Board  of  Trade  has  been  sufficient  to  secure  full  information  re- 
garding their  nominal  additions  made  each  year.  Thus  by  turn- 
ing to  the  annual  railway  returns  of  the  Board  of  Trade,  one 
may  see  at  a  glance  what  proportion  of  the  capitalization  of  each 
company  represents  water.  This  difference  partially  explains 
why  Parliament  has  taken  such  lenient  measures  in  regulating  it. 

Thus,  it  appears  that  publicity  is  one  of  the  most  effective  and 
practicable  checks  against  objectionable  stock  watering  in  rail- 
way finance.  To  insure  this,  railway  companies  should  be  com- 
pelled to  show  in  their  accounts  and  balance-sheets  all  their 
nominal  additions.  They  also  should  be  required  to  furnish 
periodic  and  due  statements  exhibiting  clearly  such  nominal  ad- 
ditions as  distinguished  from  the  actual  capital,  with  remarks  as 

71  Hadley,  Railroad  Transportation,  1903,  p.  156. 


148  RAILWAY   FINANCE   IN   ENGLAND  [148 

to  the  time  when,  and  circumstances  under  which,  the  additions 
were  made.  A  uniform  nomenclature  should  be  marked  on  the 
certificates  of  all  adulterated  stocks  so  as  to  avoid  confusion.  It 
further  appears  that  stock  watering  in  railway  finance  should 
be  discouraged  and  placed  under  government  supervision  in  all 
cases,  and  prohibited  whenever  circumstances  permit. 


CHAPTER  VII 
THE  REGULATION  OF  RAILWAY  ACCOUNTS 

The  English  legislature  took  pains  to  regulate  railway  ac- 
counting as  early  as  it  endeavored  to  regulate  other  branches  of 
railway  finance;  but  it  did  not  prescribe  any  precise  system  of 
accounting  before  1868.  The  keeping  of  accounts  had  been 
obligatory  upon  the  railway  companies  in  common  with  other 
joint  stock  companies.  For  this  purpose  separate  provisions 
were  made  in  the  special  acts  of  incorporation.  Thus  a  clause 
in  the  Croydon  Act  of  1837  *  provided : 

' '  That  the  said  directors  shall  cause  a  book  or  books  to  be  kept 
by  a  book-keeper  who  shall  be  expressly  appointed  by  the  said 
directors  for  that  purpose,  and  who  shall  enter  or  cause  to  be 
entered  in  the  said  book  or  books  true  and  regular  accounts  of  all 
sums  of  money  received  and  expended  for  or  on  account  of  the 
undertaking  .  .  .  ;  and  such  book  or  books  shall  at  all  rea- 
sonable times  be  open  to  the  inspection  of  the  respective  loan 
creditors  .  .  .  without  fee  or  reward,  and  the  said  loan 
creditors  or  any  of  them  may  take  copies  of  or  extracts  from  the 
said  book  or  books  without  paying  anything  for  the  same ;  and  in 
case  the  said  book-keeper  shall  refuse  to  permit  such  loan  cred- 
itors or  any  of  them  to  inspect  such  book  or  books,  or  to  take 
such  copies  or  extracts  as  aforesaid,  such  book-keeper  shall  for- 
feit and  pay  over  for  every  such  offence  any  sum  of  money  not 
exceeding  £20." 

In  1841  a  member  of  Parliament  inquired  of  the  president  of 
the  Board  of  Trade  as  to  whether  it  had  not  become  necessary 
to  take  evidence  to  show  that  all  railway  companies  should  peri- 
odically furnish  to  the  Board  of  Trade  a  debtor  and  creditor  ac- 
count, drawn  out  on  a  simple  but  uniform  plan,  of  their  half- 
yearly  receipts  and  expenditures,  etc.  To  this  inquiry,  however, 

1 1  V.  c.  cxir,  s.  CLXXXVIII. 

149 


150  RAILWAY   FINANCE  IN   ENGLAND  [150 

the  president  of  the  Board  of  Trade  answered  that  he  did  not 
think  that  it  had  become  desirable  to  make  any  such  regula- 
tions.2 This  last  statement  shows  how  little  value  was  attached 
to  uniform  accounting  during  the  forties. 

In  1842  in  connection  with  the  collection  of  stamp  duty  on 
passenger  fares,  a  clause  was  inserted  in  an  act  of  that  year 3  to 
the  effect  that  all  companies  should  keep  accounts  of  their  pas- 
senger receipts  in  such  form  as  should  be  prescribed  by  the  com- 
missioners of  stamps  and  taxes,  and  should,  within  five  days 
after  the  first  Monday  in  each  calendar  month,  deliver  to  the 
said  commissioners  or  other  duly  appointed  officers  a  true  copy 
or  copies  of  the  accounts  so  kept.  Another  section  4  of  this  act 
provided  that  all  books  containing  passenger  receipts  should  be 
open  to  the  inspection  of  officers  of  stamp  duties,  under  penalty 
of  £50  for  each  offense  against  the  law. 

For  the  purpose  of  government  purchase  of  railways,  a  clause 
was  introduced  in  the  Railway  Regulation  Act,  1844,5  to  the 
effect  that,  during  the  period  of  three  years  previous  to  the  time 
when  option  of  revision  of  rates  or  state  purchase  of  a  railway 
should  become  available,  true  accounts  should  be  kept  of  all 
sums  of  money  received  and  paid,  that  a  half-yearly  account  in 
abstract  should  be  prepared,  showing  the  total  receipt  and  ex- 
penditure, and  that  these  accounts  should  be  open  to  public 
inspection. 

This  general  provision  as  well  as  those  contained  in  the  act  of 
1842  just  referred  to,  were,  however,,  not  made  primarily  for  the 
purpose  of  regulating  accounts.  It  was  not  until  1845  that  gen- 
eral provisions  were  made  to  regulate  railway  accounts.  In  the 
Companies  Clauses  Act  of  that  year,6  no  less  than  eight  clauses 
were  devoted  to  the  regulation  of  this  branch  of  railway  finance. 
By  this  act,  railway  directors  were  required  to  cause  "full  and 
true  accounts  to  be  kept  of  all  sums  of  money  received  or  ex- 
pended on  account  of  the  company  .  .  .  and  of  the  matters 
and  things  for  which  such  sums  of  money  shall  have  been  re- 

2  Hansard,  73:  1070-1071. 
s  5  &  6  V.  e.  79,  s.  Iv. 
4  Section  V. 
s  7  &  8  V.  c.  85,  s.  5. 
s  8  V.  e.  16. 


151]  THE  REGULATION   OP  RAILWAY   ACCOUNTS  151 

ceived  or  disbursed.  .  . "  The  act  further  provided  7  that  the 
books  of  a  company  should  be  balanced  at  the  prescribed  periods,8 
and  an  exact  balance  sheet  should  be  made  up,  exhibiting  a  true 
statement  of  the  capital  stock,  credits,  and  property  of  every  de- 
scription belonging  to  the  company,  as  well  as  the  debts  due  by 
the  company  at  the  date  of  making  the  balance  sheet.  A  distinct 
view  of  the  profit  or  loss  which  might  have  arisen  in  the  course 
of  the  preceding  half  year  should  also  be  presented.  Such  bal- 
ance sheet  was  also  required  to  be  examined  by  at  least  three  of 
the  directors,  and  was  to  be  signed  by  the  chairman  or  deputy 
chairman  of  the  company.  Moreover,  both  the  shareholders  and 
mortgagees  were  authorized  to  have  access  to  these  accounts  at 
the  prescribed  or  other  reasonable  times,  with  the  liberty  of  tak- 
ing extracts  therefrom  without  charge.9  In  the  Railways  Clauses 
Act  of  the  same  year,10  a  further  provision  was  made  to  require, 
under  penalty,11  railway  companies  to  prepare  and  transfer  to 
the  clerks  of  the  peace  and  the  over-seers  of  the  poor  of  the  coun- 
ties and  parishes  traversed  by  the  railway,  abstracts  of  their  an- 
nual accounts. 

The  financial  depression  caused  by  the  railway  mania  of  1847 
led  to  some  investigation  of  the  accounts  of  railway  companies. 
A  committee  of  the  House  of  Lords  was  appointed  in  1849  to 
consider  "whether  the  railway  Acts  do  not  require  amendment, 
with  a  view  of  providing  for  a  more  effectual  audit  of  accounts 
to  guard  against  the  application  of  the  funds  of  such  companies 
to  purposes  for  which  they  were  not  subscribed,  under  the  au- 
thority of  the  Legislature."12  This  committee  pointed  out  that 
a  serious  omission  in  the  existing  law  was  the  want  of  any  pre- 
scribed and  uniform  system  of  accounts,  and  recommended  the 
enforcement  of  some  statutory  forms  to  be  binding,  within  cer- 

7  Section  116. 

s  If  no  period  is  prescribed,  then  the  balance  should  be  made  fourteen 
days  at  least  before  each  ordinary  meeting. 
»  8  V  cap.  16,  ss.  55  and  117-119. 

10  8  V.  cap.  20,  s.  107. 

11  In  case  any  railway  company  should  fail  to  prepare  or  transmit  such 
accounts  as  required  by  law,  it  should  forfeit  for  each  failure  the  sum  of 
twenty  pounds. 

12  Eeport  of  Eoyal  Commission  on  Eailways,  1867,  p.  xviii. 


152  RAILWAY   FINANCE  IN   ENGLAND  [152 

tain  limits,  upon  all  railway  companies.13  It  further  proposed 
that  the  statutory  forms  should  embrace  the  following  partic- 
ulars :  " 

1st.  A  full  .statement  of  all  the  parliamentary  powers  granted 
for  raising  money,  showing  the  undertakings  to  which  they  were 
applicable ;  the  manner  in  which  the  money  had  been  raised ;  the 
nature  of  securities  issued  under  each  act,  with  the  condi- 
tions and  rate  of  interest  applicable  to  each,  and  the  amount  of 
money  obtained  and  in  arrears;  and  the  balance  of  parliamen- 
tary powers  unexhausted. 

2nd.  A  capital  account  explaining  how  the  money  shown  as 
having  been  raised  under  the  parliamentary  account  had  been 
dibursed,  and 

3rd.  An  account  of  the  ordinary  income  and  expenditure  of 
the  railway  company. 

It  also  recommended  that  separate  accounts  should  be  kept  for 
separate  branches  of  the  enterprise  of  every  company. 

Moreover,  it  was  further  urged  that  the  right  of  inspection  by 
shareholders  of  the  companies'  accounts  should  be  unrestrained; 
that  all  accounts  without  exception  touching  or  relating  to  the 
receipts  or  payments  of  each  company  should  be  required  to  be 
produced,  and  that  in  case  of  refusal  the  statutory  penalty 
should  be  extended  from  the  book-keeper  to  the  governing  body. 

About  the  same  time,  the  Railway  Commissioners 15  also  voiced 
the  opinion,  apparently  with  the  general  approval  of  the  rail- 
ways, that  the  companies  should  specify  in  their  accounts  every 
loan  contract,  the  period  for  which  it  was  contracted,  with  the 
rate  of  interest  and  the  liquidation  of  such  loans  or  portion 
thereof  as  might  be  made  from  time  to  time.16 

These  recommendations,  practical  as  they  were,  failed  to  ma- 
ture into  legislation.  They  were  too  much  out  of  line  with  the 
laissez  faire  ideas  of  the  time. 

During  1859  to  1862,  the  Board  of  Trade  persistently  recom- 
mended that  separate  accounts  should  be  kept  of  the  amounts  of 

is  Report  of  1909  Departmental  Committee  on  Accounts,  etc.,  p.  4. 

i*  Report  of  Royal  Commission  on  Railways,  1867,  p.  xciii. 

is  These  early  railway  commissioners  had  the  duty  of  examining  railway 
bills  and  differed  materially  from  those  appointed  since  1873. 

is  C.  L.  Webb,  Letter  to  the  President  of  tJie  Board  of  Trade,  1848,  pp. 
59-60. 


153]  THE  REGULATION   OF   RAILWAY   ACCOUNTS  153 

debenture  stocks  created  and  disposed  of,  and  of  the  application 
of  the  money  raised  by  such  issues.17  It  was,  however,  not  until 
1866  that  Parliament  began  to  give  effect  to  some  of  these  recom- 
mendations. In  the  Companies  Securities  Act,  1866,  provisions 
were  made  to  require  all  railway  companies,  within  fourteen 
days  after  the  end  of  each  half  year,  to  make  an  account  of  their 
loan  capital  authorized  to  be  raised  and  actually  raised  up  to  the 
end  of  that  half  year.  In  the  account,  the  railway  companies 
were  required  to  specify  the  following  particulars,  in  addition 
to  what  was  required  by  former  acts. 

(1).  The  amount  or  prospective  amount  of  loans  authorized 
or  confirmed  by  Parliament; 

(2).  Whether  or  not  the  obtaining  of  the  certificate  of  a 
justice  for  any  purpose,  or  the  obtaining  of  the  assent  of  a  meet- 
ing of  the  company,  was  made  a  condition  precedent  to  the  ex- 
ercise of  the  borrowing  powers ; 

(3).     The  date  at  which  such  condition  was  fulfilled; 

(4).  The  aggregate  amount  of  the  company's  existing  debts 
contracted  on  mortgage,  bond,  or  debenture  stock,  up  to  the  end 
of  the  half  year ;  and 

(5).     The  aggregate  amount  remaining  to  be  borrowed. 

Then  the  second  and  every  subsequent  half-yearly  accounts 
were  required  to  show  the  items  described  in  paragraphs  (1)  and 
(4)  for  two  consecutive  years,  and  the  increase  or  decrease 
of  any  of  those  items  in  the  second  of  those  half  years  as  com- 
pared with  the  first.  The  Board  of  Trade  was  authorized  to 
prescribe,  by  public  notice  in  the  London  Gazette,  the  forms  of 
the  half-yearly  accounts  of  the  loan  capital  of  railways  from 
time  to  time.18 

The  act  further  provides  that  within  twenty-one  days  after 
the  end  of  each  half  year,  every  railway  company  should  deposit 
with  the  registrar  of  joint  stock  companies,  a  copy,  certified  and 
signed  by  the  company 's  registered  officer  as  a  true  copy,  of  their 
loan  capital  half-yearly  account.  Moreover,  these  accounts  were 
to  be  open  to  the  inspection  of  shareholders,  stockholders,  etc.,  at 
all  reasonable  times  without  charge. 

Furthermore,  the  act  made  it  unlawful  for  any  railway  com- 

17  General  report  of  the  Board  of  Trade  on  Railway  bills,  1861,  p.  23. 
is  29  &  30  V.  cap.  108,  s.  6. 


154  RAILWAY   FINANCE   IN   ENGLAND  [154 

pany  to  borrow  any  money  on  mortgage  or  bond,  or  to  issue  any 
debenture  stock,  ' '  unless  and  until  they  have  first  deposited  with 
the  registrar  of  joint  stock  companies  ...  a  statement  cer- 
tified and  signed  by  the  company's  officer"  in  the  prescribed 
manner.19 

By  this  series  of  enactments,  Parliament  "endeavored  to  se- 
cure a  faithful  record  and  account  of  all  the  financial  transac- 
tions of  the  companies  to  be  kept  under  the  authority  of  the  di- 
rectors; a  power  for  any  shareholder  within  limited  bounds  to 
examine  the  company's  accounts;  the  periodical  exhibition  of  a 
balance  sheet  showing  all  the  capital,  stock,  credits,  and  prop- 
erty of  and  debts  due  by  the  company,  and  giving  a  distinct 
view  of  the  profit  and  loss ;  and  the  payment  of  a  dividend  out 
of  profits,  coupled  with  a  prohibition  against  reduction  of  cap- 
ital by  means  of  dividends.  .  . "  20 

It  may  be  observed,  however,  that  all  except  the  last  one  of 
the  statutes  referred  to  were  enacted  for  the  purpose  of  requir- 
ing the  companies  to  keep  accounts  according  to  their  own  way, 
without  any  governmental  interference.  Even  the  act  of  1866 
just  referred  to  went  no  further  than  to  authorize  the  Board  of 
Trade  to  prescribe  and  alter  some  forms  of  loan  accounts.  In- 
deed, it  was  not  until  the  report  of  the  Royal  Commission  on 
Railways  of  1867  had  been  made  that  steps  were  taken  by  means 
of  the  Regulation  of  Railways  Act,  1868,  to  give  effect  to  the  far- 
sighted  recommendations  of  the  select  committee  of  1849  regard- 
ing the  adoption  of  a  uniform  system  of  accounts.  We  shall, 
therefore,  examine  (1)  how  the  results  of  the  old  system  of  reg- 
ulation of  railway  accounts  led  to  the  adoption  of  the  new  sys- 
tem of  1868,  (2)  the  nature  of  the  principles  set  forth  in  the 
new  system,  (3)  the  defects  of  the  new  system,  and  (4)  what 
Parliament  has  done  since. 

The  early  system  of  regulation  required  railway  companies 
themselves  to  keep  true  and  clear  accounts  of  all  their  incomes 
and  disbursements  for  the  purpose  of  preventing  irregularities 
in  the  application  of  the  companies'  capital.  This  was  based 
on  the  assumption  that  the  ordinary  maxims  of  prudence  and 
good  faith,  combined  with  the  usual  practice  of  persons  engaged 
in  commercial  affairs  would  be  sufficient  to  secure  the  observance 

19  29  &  30  V.  e.  108,  s.  10. 

20  Eeport  of  Eoyal  Commission  on  Eailways,  1867,  p.  xxiii. 


155]  THE   REGULATION   OF   RAILWAY   ACCOUNTS  155 

of  these  regulations.21  "Unhappily/'  as  it  was  remarked  in  the 
House  of  Commons  in  1867,22  "the  fact  was  far  otherwise."  It 
was  true  that  railway  companies  always  kept  accounts  and  uni- 
formly prepared  a  sort  of  balance  sheet  every  half  year;  "but 
it  was  frequently  such  as  no  merchants  or  bankers  would  be  sat- 
isfied with."  It  was  claimed  that  a  great  number  of  companies 
considered  a  balance  sheet  a  means  of  mystifying  and  mislead- 
ing their  proprietors  and  the  public,  and  that  balance  sheets 
were  often  used  to  conceal  the  real  state  of  a  company.  It  has 
even  been  said  that  the  balance  sheet  of  a  railway  company  has 
no  more  effect  than  a  sheet  of  waste  paper.23 

Moreover,  there  was  no  uniformity  whatever  in  the  matter  of 
railway  accounts  during  those  years.24  One  company  had  one 
form  of  accounts ;  a  second  one,  another ;  and  a  third  one  a  form 
still  different.  It  was  not  only  impossible  to  compare  the  ac- 
counts of  the  different  companies,  but  also  impossible  even  to 
compare  the  accounts  of  the  same  company  for  different  years. 

Regarding  the  prohibition  against  the  wrong  application  of 
the  companies'  capital,  Sir  William  Hunt  in  introducing  the 
railway  and  joint  stocks  companies'  account  bill,  1868,  said,25 
that  no  one  could  read  the  act  of  1854  for  the  consolidation  of 
railway  and  joint  stock  companies,  or  the  Companies'  Act  of 
1862,  without  being  struck  by  the  grave  and  imperative  language 
in  which  the  acts  directed  that  no  dividend  should  be  paid  un- 
less their  accounts  showed  that  the  dividend  has  really  been 
earned,  and  could  be  paid  out  of  the  net  profits  of  the  company. 
But  in  this  case  also  the  law  has  proved  ineffectual.  Directors 
were  often  tempted  to  disregard  all  the  moral  and  legal  obliga- 
tions in  order  to  make  things  look  "pleasant"  to  their  propri- 
etors. Dividends  were  frequently  declared  out  of  capital,  until 
it  became  impossible  to  tell  whether  or  not  it  was  really  earned.26 

The  effect  of  this  practice  was  that  railway  shareholders  were 
so  "bewildered  and  mystified  by  cooked  accounts,  manipulated 
figures,  partial  statements,  and  delusive  representations  of  rail- 
way property"  that  they  actually  regarded  the  payment  of  divi- 

21  Hansard,  187:   1588. 

22  Ibid. 

23  Fraser,  British  Railways,  1903,  p.  140. 
2*  See  Railway  Times,  May  23,  1868. 

25  Hansard,  187:  1588. 

26  London  Times,  August  27,  1866. 


156  RAILWAY   FINANCE   IN   ENGLAND  [156 

dend  out  of  capital  as  a  legitimate  practice  and  looked  at  the 
chaos  of  railway  accounting  as  hopeless.  Apparently  they  im- 
agined that  they  could  "eat  their  cake  and  have  it  too."  27  As 
a  natural  consequence  of  this  state  of  affairs,  suspicion  arose, 
which  proved  harmful  not  only  to  the  public  but  to  the  railways 
as  well.  As  said  the  London  Times  in  1866,28  "nothing  has  dam- 
aged railway  property  so  much  as  the  suspicion,  notoriously  rea- 
sonable, that  the  truth  was  not  put  before  the  public  in  the  re- 
ports of  railway  directors. ' ' 

The  magnitude  of  the  evil  due  to  the  lack  of  confidence  could 
not  be  fully  comprehended  at  the  time.  The  problem  facing  the 
railway  companies  was  not  merely  to  satisfy  the  shareholders  of 
that  time.  It  was  necessary  that  they  should  give  assurance  to 
the  investing  public  in  order  to  get  additional  money  to  keep  the 
railways  "alive."  Explanations  at  meetings,  statements  of  fig- 
ures capable  of  favorable  inference,  sometimes  sufficed  to  satisfy 
those  who  had  already  put  their  money  in;  but  they  could  not 
attract  new  investment. 

Following  the  suspicion  of  the  investing  public,  the  share- 
holders also  became  discontented.  They  saw  their  property  de- 
preciating; they  found  that  their  shares  could  be  disposed  of 
only  at  great  sacrifices.  No  longer  were  they  to  be  satisfied  with 
"information"  alone.29 

The  difficulty,  however,  was  not  exactly  an  economic  one. 
There  was  plenty  of  money  for  investment.  It  was  generally 
recognized  at  the  time  by  clearer  observers  that  if  there  was  a 
single  company  where  shares  were  considered  by  its  directors  to 
have  fallen  too  low  in  the  market,  they  could  set  the  matter  right 
easily.  There  were  plenty  of  shrewd  people  at  the  time  waiting 
with  money  to  find  investments.  "Give  them  a  statement  such 
as  they  require,  and  such  as  any  city  accountant  .  .  .  would 
prepare,  in  a  form  that  the  simplest  tradesman  might  under- 
stand it,  and  forthwith  they  will  bid  within  a  fraction  of  the  true 
value  of  the  shares."30  Thus  the  problem  before  Parliament 
was  to  stop  suspicion  and  to  restore  confidence.31 

27  London  Times,  November  8,  1867,  p.  6. 

28  Ibid.,  August  27,  1866. 

29  Economist,  December  28,  1867. 

so  Fraser,  British  Railways,  1903,  p.  140. 
si  Economist,  December  23,  1867. 


157]  THE  REGULATION   OP   RAILWAY   ACCOUNTS  157 

It  was  recognized  that  besides  retreating  from  the  costly 
litigations,  in  which  the  railways  were  fond  of  indulging,  there 
was  only  one  thing  required  to  set  the  railways  ' '  straight  before 
the  public."32  They  must  make  a  clear  statement  of  their 
affairs.  However  unpromising  it  might  be,  the  whole  truth  must 
be  told  so  that  no  disguise  or  reserve  could  be  suspected.  It  was 
urged  that 33  there  was  no  cure  for  the  mischief  of  delusion  nor 
any  hope  for  railway  property  except  by  the  introduction  of  a 
principle  of  accounting  in  which  nothing  should  be  admitted  as 
profit  but  surplus  of  actual  receipts  over  actual  expenditures. 
The  Royal  Commission  on  Railways  in  its  report  of  1867  also 
recognized  3*  that  greater  facilities  should  be  afforded  for  the  de- 
tection and  repression  of  acts  by  which  the  public  were  misled 
or  deceived.  It  further  said,  "The  concealment  or  imperfect 
representation  of  important  facts,  which  no  one  is  charged  with 
the  duty  of  faithfully  disclosing  to  the  shareholders  or  the  pub- 
lic, will  be  found  to  underlie  most  of  the  delinquencies  .  .  . 
and  there  can  be  little  doubt  that  many  objectionable  transac- 
tions would  not  be  embarked  in  if  they  were  to  be  immediately 
followed  by  publicity.  .  . "  A  member  of  Parliament 35  urged 
before  the  commission  that  Parliament  should  take  care  to  see 
that  the  periodical  railway  accounts  should  "comprise  not  only 
every  item  of  expenditure  but  every  liability,  and  every  contract 
that  they  have  entered  into  .  .  .  and  leave  the  public  to 
judge  for  themselves.  Many  other  members  of  Parliament  were 
also  of  the  opinion  that  shareholders  should  only  ask  the  legis- 
lature to  require  that  accounts  be  kept  in  an  intelligent  way  so 
that  they  may  have  a  chance  to  "sift  them  to  the  bottom."  36 

But  it  was  the  report  of  the  commission  that  gave  uniform  ac- 
counting its  proper  place  of  importance.37  It  emphasized  that 
the  provisions  of  the  law  regarding  the  financial  affairs  of  rail- 
way companies  would  always  remain  defective,  until  a  uniform 
system  of  accounts  was  secured.  Until  that  was  done,  each  com- 

32  London  Times,  February  9,  1863,  p.  9. 
ss  Ibid.,  November  8,  1867,  p.  6. 

3*  Report  of  Eoyal  Commission  on  Railways,  1867,  p.  xliv. 
ss  G.   P.   Bidder,   M.   P.,  before  Eoyal  Commission   on  Eailways,   1867. 
Evidence  before  Royal  Commission,  p.  803. 
se  Hansard,  191 :  1541-1542. 
37  Report  of  Royal  Commission,  1867,  p.  XXIII. 


158  RAILWAY   FINANCE   IN   ENGLAND  [158 

pany  was  at  liberty  to  adopt  its  own  form  of  accounts  and  to 
vary  that  form  from  time  to  time.  The  result  would  always  be 
that  no  adequate  comparison  of  the  financial  affairs  of  different 
railways,  or  even  of  the  same  railway,  could  be  made.  This  lack 
of  uniformity  in  accounting  not  only  deprived  the  public  of  the 
power  to  ascertain  the  relative  conditions  of  different  companies, 
but  also  deprived  one  company  of  the  means  of  profiting  by  the 
experience  of  another. 

Thus  it  soon  became  generally  recognized  that  until  clear,  com- 
plete and  truthful  accounts,  on  a  common  system,  could  be  ob- 
tained, there  would  be  continued  suspicion.  The  urgent  need  of 
such  a  uniform  system  of  accounts  was  recognized,  alike,  by  the 
railways  and  Parliament.  This  was  well  shown  by  the  fact  that 
while  both  Houses  of  Parliament  were  giving  the  matter  atten- 
tion, the  railway  men  themselves  were  holding  meetings,  in  1868, 
to  discuss  the  same  subject.38 

To  give  effect  to  some  of  these  recommendations,  Sir  "William 
Hunt  introduced  the  Railway  Audit  of  Accounts  Bill  early  in 
the  session  of  1867.39  In  the  following  year,  another  bill,  called 
the  Joint  Stock  Companies  Accounts  Bill,  was  introduced,  the 
aim  of  which,  similar  to  that  of  the  bill  of  the  previous  year,  was 
to  secure  to  shareholders  and  the  public,  periodically,  a  true  bal- 
ance sheet  of  the  financial  affairs  of  railway  companies  and  a 
true  statement  of  the  assets  and  liabilities.40 

Neither  of  these  bills,  however,  was  enacted  into  law.  In  the 
meantime,  the  government  prepared  the  Regulation  of  Railways 
Bill,  which  embodied  many  of  the  principles  contained  in  the 
two  bills  just  referred  to.  This  bill  was  first  introduced  into  the 
House  of  Lords.41  A  considerable  proportion  of  the  bill  was 
based  on  the  recommendations  of  the  Royal  Commission.42  More- 
over, the  Board  of  Trade  had  also  received  frequent  deputations 
and  much  correspondence  on  the  subject  from  railway  experts.43 
In  fact  some  of  the  very  fundamental  matters,  such  as  the  forms 

ss  Railway  Times,  May  23,  1868. 

39  For  purpose  of  this  bill,  see  Eailway  Times,  June  15,  1867. 

40  Hansard,  187:  1588. 
4i/&td.,  192:  1294. 

42  Hansard,  192:  115-116. 

43  IUd.,  192 :  1294. 


159]  THE   REGULATION   OF   RAILWAY   ACCOUNTS  159 

of  accounts,  etc.,  were  adopted  only  after  extended  consultation 
with  some  of  the  most  prominent  railway  accountants.44 

When  the  Regulation  of  Railways  Bill  was  introduced,  the 
legislators  recognized  the  great  change  which  had  taken  place  in 
the  English  railway  system  since  the  forties.  Thus  attention  was 
called  to  the  fact  that  all  legislation  connected  with  railways 
must  be  cautious,  practical,  and  well  considered,  and  that  in 
dealing  with  the  subject  it  was  as  necessary  to  look  at  the  inter- 
est of  the  public,  on  whose  behalf  the  railways  were  constructed, 
as  it  was  necessary  to  take  care  of  the  interest  of  the  sharehold- 
ers who  expended  their  money  in  those  great  undertakings.45 
Parliament  was  also  reminded  that  it  was  by  no  means  desirable 
to  adopt  a  policy  by  which  it  would  lay  down  stringent  rules 
with  respect  to  all  the  details  of  accounts  and  the  management 
of  the  companies.46  It  was  believed  that  sufficient  time  had 
elapsed  since  the  panic  of  1866-1867  to  afford  Parliament  the 
means  of  legislating  upon  the  subject  without  acting  in  the  hasty 
and  ill  considered  manner  which  might  have  been  inevitable  if 
they  had  dealt  with  it  during  the  previous  session.47  The  com- 
plete collapse  also  led  the  public  and  the  railways  to  appreciate 
more  fully  whatever  action  might  be  taken.  It  was  under  the 
influence  of  such  prevailing  opinion  that  the  first  important  act 
to  regulate  railway  accounts  was  prepared. 

The  first  part  of  the  bill  related  to  accounts  and  audit;  the 
second  to  the  liabilities  of  railway  companies  in  certain  cases  as 
general  carriers ;  the  third  provided  for  the  safety  of  passengers ; 
the  fourth  dealt  with  the  matter  of  compensation  for  accidents; 
the  fifth  had  to  do  with  light  railways ;  the  sixth  referred  to  arbi- 
trations by  the  Board  of  Trade ;  and  the  last  part  was  given  to 
miscellaneous  matters.  "None  of  these,"  said  the  Economist,48 
1 '  are  unimportant ;  and  all  are  designed  to  bring  railway  law  into 
accordance  with  recent  experience. ' '  But  the  ' '  novel  part  of  the 
bill  is  the  first  section,  making  new  rules  for  the  auditing  and 
inspection  of  railway  accounts."  On  account  of  its  importance 

44  Hansard,  190 :  1957. 

45  Ibid.,  190:  1955. 

46  Ibid.,  190  :  1956. 

47  Ibid.,  190:  1956. 

48  Economist,  March  21,  1868. 


160  RAILWAY   FINANCE   IN   ENGLAND  [160 

and  novel  nature,  that  part  of  the  bill,  therefore,  received  much 
discussion  both  in  and  out  of  Parliament. 

During  the  course  of  the  passage  of  the  bill,  Parliament  laid 
great  emphasis  upon  the  importance  of  the  forms  of  accounts 
which  were  attached  to  the  bill.  It  had  in  mind  that  the  ac- 
counts should  neither  on  the  one  hand  be  limited  to  the  ordinary 
payments  and  receipts,  nor  on  the  other  hand  be  so  extensive  as 
to  make  it  hard  for  the  eye  to  follow  or  the  mind  to  compre- 
hend.49 They  should  be  sufficiently  elastic  to  meet  the  varying 
circumstances  of  the  different  railways,  and  at  the  same  time 
precise  enough  to  enable  shareholders  of  ordinary  intelligence  to 
compare  one  year's  accounts  with  those  of  any  other  year  and 
the  accounts  of  one  company  with  those  of  another.  The  guid- 
ing purpose  was  that  every  person  looking  at  these  forms  should 
be  able  to  see  at  a  glance  the  exact  financial  position  of  each 
company.50 

The  importance  of  uniformity  in  railway  accounts  was  greatly 
emphasized.  The  advocates  of  such  a  uniform  system  had  in 
mind  two  important  objects:  First,  to  prevent  the  "dressing" 
of  accounts,  and  secondly  to  insure  that  every  item  of  expendi- 
ture should  pass  through  the  books  of  the  company.  Incidental- 
ly, it  was  also  hoped  that  when  all  companies  adopted  the  same 
form  of  accounts,  the  public  and  the  investors  would  be  enabled 
to  form  some  estimate  of  the  values  of  the  shares  and  securities 
of  railways.51 

But  it  was  recognized  that  according  to  the  provisions  of  the 
bill,  the  usefulness  of  the  prescribed  uniform  system  of  accounts 
would  largely  depend  upon  the  voluntary  efforts  of  the  com- 
panies themselves.  If  the  companies  made  use  of  these  pre- 
scribed forms,  as  they  should  for  their  own  interest,  the  uniform 
system  would  be  of  great  value.  The  auditors  and  inspectors 
would  have  a  convenient  guide  in  the  "labyrinth  of  accounts."  52 
The  common  form  would  become  familiar,  and  people  would 
know  what  to  verify.  One  more  important  and  general  use  of 
such  a  common  system  was  that  so  long  as  there  was  no  down- 
right falsification,  it  would  be  possible  to  compare  one  railway 

49  Hansard,  190 :  1972. 

so  Hansard,  190:  1957. 

si  Ibid.,  191:  1538. 

52  Economist,  August  29,  1868,  p.  993. 


161]  THE   REGULATION   OF   RAILWAY   ACCOUNTS          ,  161 

with  another,  and  that,  where  circumstances  were  nearly  similar, 
the  comparison  would  be  invaluable.53  As  a  prominent  railway 
accountant  said,  in  the  Manchester  Railway  Conference  in  1868, 
"The  importance  of  the  adoption  by  all  railway  companies  of  a 
clear,  complete  and  uniform  system  of  accounts,  properly  audit- 
ed and  vouched,  can  scarcely  be  over-estimated.  .  . " 5*  It  was 
generally  recognized  that  it  was  exceedingly  desirable  to  have 
one  form  of  accounts.55  In  fact  all  those  members  of  Parliament, 
who  spoke  in  connection  with  the  bill  during  its  passage,  advo- 
cated the  adoption  of  a  uniform  system. 

Some  contended,  however,  that  it  was  impossible  to  have  a  uni- 
form scheme  of  accounts  for  all  companies,  because  the  circum- 
stances of  the  different  companies  were  so  dissimilar.  A  uniform 
scheme  would  not  furnish  any  accurate  comparison,  it  was 
urged,  unless  people  knew  what  were  the  gradients  of  each  line 
and  the  prices  of  fuel  and  labor  in  each  instance  as  well  as  other 
details  which  varied  in  different  places.56  This  objection,  how- 
ever, failed  to  gain  much  weight  and  experience  has  since  proven 
that  a  uniform  system  is  desirable  in  spite  of  its  drawbacks. 

The  greatest  defect  of  the  bill,  however,  was  said  to  be  the  lack 
of  any  regulations  governing  the  "filling  up"  of  the  uniform 
forms.  It  was  urged  that  the  usefulness  of  these  forms  might  be 
much  lessened,  if  not  nullified,  by  irregularities  in  the  entering 
of  the  different  expenses  into  the  accounts.  Thus  the  Economist 
said,57  "We  question  very  much  .  .  .  whether  the  dictation 
of  a  certain  form  in  the  accounts  will  do  much  good.  .  . 
There  will  be  room  for  endless  disputes  as  to  whether  certain 
expenses  are  for  renewals  or  new  works,  or  as  to  whether  capital 
or  revenue  should  be  changed.  .  . "  It  also  believed 58  that 
the  distrust  of  the  people  had  been  related  to  the  substance  of 
the  accounts,  and  that  changing  the  form  would  not  mend  mat- 
ters much. 

The  London  Times  also  pointed  out  that  "a  uniform  system 
of  accounts  would  prevent  one  line  from  showing  better  than  an- 

ss  Economist,  August  29,  1868,  p.  995. 

s*  Railway  Times,  May  23,  1868. 

ss  Hansard,  190 :  1961-62. 

ss  Ibid.,  187:  1590-91. 

57  Economist,  March  21,  1868. 

ss  Ibid.,  August  29,  1868,  p.  992. 


162  RAILWAY   FINANCE   IN   ENGLAND  [162 

other,  but  it  would  not  prevent  them  all  from  showing  un- 
truly. ' ' 69  This  paper  believed  that  the  people  clamored  mostly 
over  the  evil  itself,  instead  of  the  source  of  the  evil.  ' '  The  root 
of  the  evil, ' '  it  said,  ' '  lies  not  so  much  in  the  system  of  accounts, 
of  which  every  body  complains,  as  in  the  principle  of  account- 
ing. .  ."60 

These  anticipations,  especially  that  of  the  Economist,  have  be- 
come true  since,  as  shown  by  the  report  of  the  departmental 
committee  on  railway  accounting  and  statistical  returns  of  1909 
to  be  referred  to  hereafter. 

It  was  also  urged  that  there  should  have  been  inserted  in  the 
act  provisions  for  a  "wear  and  tear"  account.  It  was  believed 
that  the  proper  way  of  providing  for  renewals  was  to  lay  aside 
certain  sums  annually  in  proportion  to  the  value  of  the  material 
and  the  depreciation  it  would  suffer.  This  was  regarded  as  be- 
ing especially  important,  since  the  pressure  of  heavy  renewals 
had  been  one  of  the  chief  factors  in  tempting  railway  boards  to 
charge  capital  with  what  did  not  belong  to  it.  In  spite  of  the 
requirement  of  the  engineers'  certificates  concerning  rolling 
stock  and  permanent  ways  as  provided  by  the  bill,  some  railway 
men  thought  that  it  would  be  impossible  to  ascertain  the  real 
surplus  profit  to  be  divided  as  dividends  without  a  depreciation 
account.61 

Furthermore,  there  were  also  other  persons  who  were  entirely 
opposed  to  any  such  regulation  of  accounting.  They  based  their 
opposition  chiefly  on  the  ground  that  England  ' '  had  grown  great 
by  having  private  parties  to  manage  their  own  affairs  in  their 
own  way  —  by  individual  care  of  individual  interest  which  could 
not  be  superseded  by  the  action  of  any  government  department 
whatever."  62  The  Railway  Times,03  which  was  strongly  opposed 
to  the  measure,  said,  ' '  The  entire  railway  history  of  the  kingdom 
is  redolent  of  the  idea  as  well  as  of  the  practice  of  shareholders 
being  at  all  times  and  under  all  circumstances  fully  cognizant  of 
any  matter  or  detail  in  which  their  property  may  be  involved." 
After  citing  the  satisfactory  results  of  several  of  the  companies 

59  London  Times,  November  8,  1867,  p.  6. 
eo  Ibid.,  November  6,  1867,  p.  6. 

61  See  Economist,  August  29,  1868,  p.  993. 

62  See  Hansard,  167 :  1569. 

63  Railway  Times,  June  8,  1867. 


163]  THE   REGULATION   OP   RAILWAY   ACCOUNTS  163 

who  had  been  left  to  manage  their  accounts  in  their  own  way, 
the  paper  concluded  that  "all  these  private  parties  have  been 
conducting  their  own  affairs  in  their  own  way ;  and  is  not  to  be 
endured  that  they  should  be  interfered  with.  .  ." 

Furthermore,  in  the  debate  in  Parliament,  it  was  also  agreed 
that  it  was  quite  impossible  to  control  railway  directors  by  acts 
of  Parliament.  If  they  were  determined  to  "cook"  the  accounts, 
they  would  do  so,  in  spite  of  all  the  acts  in  the  statute  book.64 

Another  important  provision  of  the  bill  was  that  regarding  the 
penalty  for  falsifying  accounts.  This  question  did  not  receive 
so  wide  discussion  as  that  concerning  the  accounts  themselves  but 
it  excited  more  animated  debate  in  Parliament  than  any  other 
part  of  the  bill.  The  original  bill  provided  that  "if  any  state- 
ment of  accounts,  balance  sheet,  estimate  or  report,  which  is  re- 
quired by  this  act  is  false  in  any  particular,  the  auditor  or  officer 
of  the  company  who  signed  the  same  shall,  unless  he  satisfies  the 
court  that  tries  the  case  that  he  was  ignorant  of  such  falseness, 
be  liable,  on  conviction  thereof  on  indictment,  to  fine  or  impris- 
onment, or  on  summary  conviction  thereof  to  a  penalty  not  ex- 
ceeding fifty  pounds. ' ' 65 

The  most  striking  feature  of  this  provision  was  that  the  onus 
of  proof  was  placed  on  the  defendant.  This  at  once  aroused  in- 
tense opposition.  The  beneficial  effect  of  punishing  the  wilful 
falsification  of  railway  accounts  was  generally  admitted ;  but  the 
manner  of  inflicting  such  punishments  as  provided  by  the  clause 
proved  extremely  distasteful  to  many.  The  provision  was 
strongly  opposed  because  it  was  entirely  contrary  to  ordinary 
principles  of  law.  According  to  usage,  a  man  was  assumed  to  be 
innocent  until  he  was  proven  guilty,  while  according  to  the  pro- 
vision in  the  bill,  the  railway  officers  were  to  be  held  guilty  until 
they  could  establish  their  innocence.  According  to  this  prin- 
ciple, it  was  feared  that  if  there  was  any  falsehood  in  any  of  the 
accounts,  statements,  balance  sheets,  etc.,  so  voluminously  re- 
quired by  the  bill,  and  which  the  chairman  and  secretary  were 
required  to  sign,  they  would  be  held  guilty  and  might  be  sent  to 
jail  unless  they  could  prove  their  ignorance  of  the  falsity.  Nor 
were  railway  officers  to  be  allowed  the  ordinary  privilege  of  trial 

e*  See  "Hansard,  191,  p.  1540. 

es  Railway  Times,  March  21,  1868. 


164  RAILWAY   FINANCE   IN   ENGLAND  [164 

by  jury  like  other  Englishmen,  but  they  must  prove  their  ig- 
norance to  the  satisfaction  of  the  court  trying  the  case.  It  was 
urged  that  this  system  would  be  liable  to  be  attended  with  great 
oppression,  to  say  nothing  of  the  violation  of  all  established  cus- 
toms. The  judges,  in  spite  of  their  ability  and  the  respect  of  the 
people  for  them,  were  not  immune  from  errors.  In  occasional 
instances,  they  might  also  have  a  grudge  against  railway  officials. 
Therefore  it  would  be  necessary,  it  was  contended,  to  appoint 
railway  officers  who  know  nothing  of  the  accounts  so  that  they 
might  be  able  to  prove  their  ignorance  and  could  sign  the  re- 
quired documents  without  danger  of  being  imprisoned  or  fined.66 
If  these  disgraceful  penalties  were  to  be  attached  to  the  ordinary 
performance  of  the  duties  of  a  railway  officer,  it  would  become 
impossible  to  find  any  respectable  people  to  perform  such  duties. 

The  Economist  also  questioned  the  practicability  of  the  pro- 
vision, not  only  because  the  provision  was  contrary  to  the  ordi- 
nary practice  of  law  but  because  it  was  illusory.  It  called  atten- 
tion to  the  fact  that  particular  falsities  were  as  likely  to  creep 
into  accounts  by  neglect  as  by  wilful  perversion.  Therefore  it 
believed  that  the  clause,  as  it  stood,  instead  of  doing  any  good  to 
insure  true  accounts  would  offer  a  premium  on  being  neglectful 
and  ignorant.67 

Ultimately,  the  heated  discussion  resulted  in  the  amendment 
of  the  penalty  clause  so  as  to  read : 68 

"If  any  statement,  balance  sheet,  estimate,  or  report  which  is  required 
by  thia  act  be  false  in  any  particular  to  the  knowledge  of  the  auditor  or 
officer  of  the  company  who  signs  the  same  for  the  company,  such  officer  or 
auditor  sh'all  be  liable  upon  conviction  thereof  on  indictment,  to  fine  or  im- 
prisonment. ' ' 

Thus  the  onus  of  proof  was  removed  from  the  defendant ;  and 
railway  officers  were  to  be  punished  for  signing  statements  and 
accounts  which  they  knew  to  be  false. 

The  bill  when  first  introduced  was  quite  a  voluminous  docu- 
ment but  it  was  found,  on  close  examination,  that  many  of  the 
provisions,  though  admirable  in  theory,  were  impracticable.  Ac- 
cordingly, it  was  greatly  reduced  in  size  before  it  reached  the 
second  reading  in  the  House  of  Lords,  so  as  to  make  it  a  smaller 

66  Hansard,  192 :  6-7  and  190 :  1962. 

67  Economist,  March  21,  1868. 

68  Hansard,  192:  7-8. 


165]  THE   REGULATION   OP   RAILWAY   ACCOUNTS  165 

and  more  practicable  measure.  After  various  modifications  and 
improvements,  the  bill  received  the  royal  assent  on  July  31, 
1868,  and  became  the  Regulation  of  Railways  Act  of  that  year.69 
Fifteen  schedules  or  forms  were  prescribed,  a  great  part  of 
which  relate  to  accounts,  while  the  others  deal  with  statistics  of 
traffic,  mileage,  etc.  They  include,  in  the  first  place,  a  set  of 
capital  accounts.  No.  1  is  a  statement  of  capital  authorized  and 
created  by  the  company,  requiring  the  enumeration  in  detail  of 
the  acts  or  certificates  of  the  Board  of  Trade,  authorizing  the 
creation  of  capital,  and  a  statement  in  each  case  of  the  amount 
actually  created  and  the  balance  left.  No.  2  is  a  statement  of 
stock  and  share  capital  created  showing  the  proportion  received, 
and  requires  the  exhibition  in  parallel  columns  of  the  amount  of 
capital  created  under  each  act  or  certificate,  the  amount  received, 
calls  in  arrear,  amount  uncalled  and  amount  unissued.  No.  3 
shows  the  capital  raised  by  loans  and  debenture  stock,  and  the 
amount  of  each  at  the  beginning  and  end  of  the  half  year  com- 
pared. These  are,  however,  subsidiary  to  Nos.  4  and  5,  the  ob- 
ject of  which  is  to  show  at  a  glance  how  the  capital  account 
stands  and  what  has  been  done  upon  it  during  the  half  year, 
especially  how  the  money  has  been  spent.  The  statements  are 
quite  detailed,  and  "shareholders  and  all  concerned  should  be 
able  to  tell,"  it  was  expected,  "at  a  glance  whether  there  is  any 
item  here  properly  belonging  to  revenue. ' ' 70  No.  6  is  a  return 
of  the  working  stock,  which  was  regarded  as  of  great  importance 
in  connection  with  the  engineers'  certificate  which  must  be  af- 
fixed to  the  accounts.71  The  object  of  Nos.  7  and  8  is  to  show 
in  detail  the  proposed  further  expenditures  on  capital  account 
in  the  following  half  year  and  subsequent  years.  A  comparison 
of  the  proposed  expenditures  compared  with  the  available  assets 
of  the  company  was  expected  to  be  of  great  value.  The  need  of 
such  an  account  had  been  insisted  upon  for  some  years  and  its 
usefulness  was  well  recognized.  It  was,  however,  pointed  out 
at  the  time  as  a  defect  that  the  directors  were  in  no  way  bound 

69  31  and  32  V.  e.  119. 

TO  Economist,  August  29,  1868. 

"i  The  "engineer  and  the  locomotive  superintendent  were  required  to  cer- 
tify, respectively,  that  the  company's  permanent  way,  stations,  etc.,  and 
the  company's  plant,  engines,  etc.,  were  maintained  in  good  working  condi- 
tion and  repair  during  the  half  year. 


166  RAILWAY   FINANCE   IN   ENGLAND  [166 

by  their  estimates  even  as  to  the  half  year  concerned ;  but  it  was 
hoped  that  this  would  be  safeguarded  by  the  fact  that  the  ensu- 
ing account  would  show  whether  or  not  the  estimates  were  cor- 
rect, although  the  remedy  would  be  only  ex  post  facto. 

Nos.  9,  10  and  11  are  revenue  accounts.  The  first  deals  with 
the  gross  revenue,  the  second  the  net  revenue,  and  the  last,  the 
appropriation  of  the  balance,  if  any,  available  for  dividends. 
Supplementary  to  No.  9  is  No.  12,  which  consists  of  abstracts  A. 
B.  C.  etc.,  referred  to  in  No.  9.  Those  abstracts  were  expected 
to  prove  especially  useful  in  enabling  the  shareholder  to  study 
his  own  company's  affairs  and  compare  its  expenditures  with 
that  of  others.  Form  No.  13  is  the  general  balance  sheet,  which 
exhibits  the  whole  system.  Statistical  forms  to  show  mileage 
statements  and  those  to  be  used  by  the  company's  engineers  and 
locomotive  superintendents  were  also  prescribed. 

These  prescribed  accounts  may  be  conveniently  classified  into 
two  groups:  those  relating  to  capital  and  those  relating  to  rev- 
enue. According  to  this  system,  the  receipts  and  expenditures 
on  capital  account  are  shown  separately  from  the  general  balance 
sheet,  which  differs  materially  from  the  American  system  where 
the  balance  sheet  exhibits  in  condensed  form  all  the  assets  and 
liabilities  of  the  company,  and  the  income  statement  shows  the 
gross  earnings  and  expenses  as  well  as  the  net  revenue  and  its 
application.  This  distinctive  feature  of  British  railway  accounts 
is  sometimes  known  as  the  "double  account  system,"  according 
to  which  the  details  of  capital  expenditures  and  capital  receipts 
are  separated  from  the  other  assets  and  liabilities.  Only  the  bal- 
ance, either  positive  or  negative,  enters  into  the  general  balance 
sheet.  This  system  is  based  on  the  theory  that  inasmuch  as  the 
capital  is  created  by  Parliament  for  a  specific  purpose,  that  pur- 
pose is  best  fulfilled  by  crediting  to  one  special  account  all 
amounts  received  from  the  issue  of  capital  securities  and  debit- 
ing the  account  with  all  the  assets  acquired  with  the  funds  so 
received.72 

According  to  the  provisions  of  the  act  every  incorporated  com- 
pany, seven  days  at  least  before  each  ordinary  half-yearly  meet- 

72  Cf.  an  able  article  by  A.  M.  Sakolski  on  the  ' '  Control  of  Railroad 
Accounts  in  leading  European  countries,"  in  the  Quarterly  Journal  of 
Economics,  May,  1910. 


167]  THE   REGULATION   OF   RAILWAY   ACCOUNTS  167 

ing,  should  prepare  and  print,  according  to  the  statutory  forms, 
a  statement  of  accounts  and  balance  sheet  for  the  preceding  half 
year  and  an  estimate  of  the  proposed  capital  expenditure  for  the 
ensuing  half  year,  which  should  be  the  same  as  those  submitted  to 
its  auditors.  In  case  of  default,  the  company  should  be  liable  to  a 
fine  of  five  pounds  per  day.  The  Board  of  Trade,  with  the  con- 
sent of  a  company,  was  authorized  to  alter  the  statutory  forms 
to  suit  special  circumstances. 

The  act  further  required  that  every  statement  of  accounts, 
balance  sheets,  etc.,  required  by  the  act,  should  be  signed  by  the 
chairman  or  deputy  chairman  of  the  company's  directors  and 
should  be  preserved  at  the  company's  principal  office.  A  printed 
copy  was  required  to  be  forwarded  to  the  Board  of  Trade. 
Shareholders  and  holders  of  debentures,  etc.,  were  also  entitled 
to  receive  copies  of  such  accounts  on  application.  However,  all 
persons  interested  in  the  company's  affairs  were  permitted  to 
peruse  the  original  copy  without  charge.  When  a  company 
should  act  in  contravention  of  these  provisions,  it  would  be  liable 
to  a  penalty  not  exceeding  fifty  pounds  for  each  offense. 

Upon  the  enactment  of  the  act,  the  Railway  Times  expressed 
much  dissatisfaction  over  the  whole  measure,73  and  several  mem- 
bers of  Parliament  also  regarded  the  act  as  being  too  weak  to  be 
of  much  value.74  More  than  anything  else,  the  means  for  secur- 
ing the  object  of  the  act  was  severely  criticised.  Dissatisfaction 
was  especially  expressed  at  the  purely  permissive  character  of 
the  requirements.  The  only  compulsory  clause  was  that  requir- 
ing the  publication  of  the  accounts  in  a  certain  form.  Even 
this  compulsory  provision  was  regarded  as  weak.  A  maximum 
penalty  of  £35  per  week  was  regarded  as  being  ineffective  to  give 
any  great  stimulus  to  exertion,  at  least  in  the  case  of  important 
companies  where  a  body  of  directors  at  any  time  had  much  to 
gain  by  a  stealthy  evasion  of  the  act.  Much  mischief  might  be 
done  long  before  it  could  become  worth  while  to  prevent  the 
accumulating  penalties.75 

On  the  other  hand,  the  Economist  at  once  recognized  the  pre- 
scribed accounts  as  being  very  "skillfully  framed."  After  ex- 

73  Railway  Times,  August  1,  1868. 
T*  Hansard,  190,  p.   1968. 
75  Economist,  March  21,  1868. 


168  RAILWAY   FINANCE   IN   ENGLAND  [168 

amining  and  criticising  every  feature,  it  concluded  that  "the 
accounts  are  very  perfect  and  likely  to  be  useful,  in  spite  of  all 
defects."76 

It  was  further  recognized  that  the  silent  influence  of  the  pro- 
visions would  have  a  great  amount  of  influence  in  preventing 
companies  from  violating  these  regulations.  The  fact  that  a  de- 
parture from  the  prescribed  forms  would  at  once  expose  a  de- 
faulting company  to  the  penalty  of  discredit,  which  would  be 
much  severer  than  a  fine,  would  insure  at  least  a  nominal  com- 
pliance with  the  provisions.77 

The  Regulations  of  Railways  Act,  1868,  closed  the  legislation 
on  railway  accounting.  The  regulations  governing,  and  the 
forms  of  accounts  adopted  in  that  year  were  generally  recognized 
as  being  very  good  in  themselves.  They  emphasize  the  advanced 
ideas  which  English  legislators  entertained  long  before  others 
realized  the  importance  of  this  branch  of  railway  regulation. 
But  they  went  no  further.  Instead  of  following  up  its  good 
start  and  taking  advantage  of  its  subsequent  experience  to  im- 
prove these  regulations  and  principles  as  courageously  as  it  had 
adopted  them,  England  settled  down  for  many  years  to  the  idea 
that  nothing  further  was  needed.  Thus  many  defects  in  these 
regulations  have  been  suffered  to  exist  during  the  last  forty 
years. 

Among  these  defects,  first  of  all,  may  be  mentioned  the  fact 
that  there  seemed  to  be  much  variation  in  the  date  of  closing  the 
financial  year  of  some  of  the  companies.  This  defect,  though 
apparently  of  little  consequence,  had  the  undesirable  effect,  as 
pointed  out  by  the  departmental  committee  on  railway  accounts 
and  statistics  of  1909,78  of  rendering  comparisons  less  valuable 
than  they  would  have  been  if  the  same  date  were  common  to  all 
companies. 

Then  the  established  regulations  required  that  railway  com- 
panies should  prepare  their  accounts  in  accordance  with  the 
forms  prescribed  in  the  act  of  1868  half-yearly  is  not  in  accord- 

76  Ibid.,  Aug.  29,  1868. 

77  Economist,  March  21,  1868. 

78  Report  of  the  Committee  of  tlie  Board  of  Trade  on  EaUtvay  Accounts 
and  Statistical  Returns,  1909  (hereafter  called  report  of  departmental  com- 
mittee on  accounts  and  statistics,  1909),  p.  4. 


169]  THE  REGULATION   OF   RAILWAY   ACCOUNTS  169 

anee  with  the  usual  practice  of  other  companies  and  does  not 
seem  necessary  according  to  expert  opinion.79 

But  another  defect,  which  is  of  much  greater  consequence,  lies 
in  the  lack  of  uniformity  in  practice.  "It  is  obviously  of  the 
first  importance,"  said  the  departmental  committee  on  railway 
accounts  and  statistics,  1909,80  "from  the  point  of  view  of  com- 
parison between  the  different  companies,  that  there  should  be 
uniformity  of  practice  among  all  the  companies  with  regard  to 
the  keeping  of  accounts  and  statistics ;  that  is  to  say,  that  every 
heading  both  in  accounts  and  in  the  statistics,  should  bear  pre- 
cisely the  same  meaning  in  the  case  of  all  railways  —  should,  in 
fact,  be  standardized."  In  this  connection  it  may  be  recalled 
that  one  of  the  leading  purposes  for  enacting  the  act  of  1868  was 
to  afford  the  means  of  a  comprehensive  comparison  between  the 
different  companies,  and  that  it  was  emphasized  at  the  time  that 
uniformity  in  practice  was  even  more  important  than  uniformity 
in  the  system  of  accounts. 

In  practice,  however,  the  emphasis  seems  to  have  been  placed 
in  the  wrong  place.  The  forms  of  accounts  themselves  are  uni- 
form, but  the  manner  in  which  these  accounts  are  filled  up  dif- 
fers among  the  different  companies.  Thus  after  reviewing  the 
diverse  nature  of  the  capital  accounts  of  some  sixteen  leading 
railways,  the  Economist 81  in  1882  stated  that  "it  would  appear 
to  be  wholly  impossible  to  construct  a  statement,  setting  forth 
the  actual  money  expenditure  upon  those  systems  —  in  many 
cases  it  would  be  difficult  even  for  the  companies  themselves  to 
construct  such  a  statement. ' '  This  financial  paper  further  stated 
that  the  capital  accounts  of  railway  companies  "were  wholly 
unreliable  for  purposes  of  contrast  with  revenue,  almost  every 
company  constructing  its  capital  account  upon  a  different  prin- 
ciple. ' '  An  English  writer  82  also  stated  that  ' '  the  first  item  of 
every  railway  balance  sheet,  which  has  yet  been  published  to  the 
world  under  state  authority  during  the  past  seventy  years,  is  the 
deliberate  expression  of  an  unmitigated  falsehood.  .  .  In  ar- 

79  Bepart  of  departmental  committee  on  railway  accounts  and  statistics, 
1909,  p.  4. 
so  Ibid.,  p.  -5. 

si  Economist,  March  4,  1882,  .pp  248-249. 
82  Fraser,  British  Railways,  1903,  pp.  138-139. 


170  RAILWAY   FINANCE   IN   ENGLAND  [170 

riving  at  each  of  these  balances,  every  conceivable  irregularity 
.  .  .  has  been  introduced,  and  has  thereby  received,  not  only 
the  sanction  but  the  approval  of  the  state. ' '  This  writer  further 
said  that ' '  the  account  is  not  a  balance  sheet  at  all,  nor  is  it  even 
a  very  defective  shadow  or  skeleton  of  one.  It  is  .  .  .  only 
the  declaration  of  an  untruth,  in  every  instance,  coupled  with  a 
list  of  a  few  of  the  most  insignificant  balances,  which  appear  in 
a  company's  set  of  subsidiary  book  of  accounts." 

We  are  not  prepared  to  agree  with  these  strong  terms.  But 
the  lack  of  uniformity  in  practice  has  recently  attracted  consid- 
erable attention.  The  departmental  committee  on  railway  ac- 
counts and  statistics,  1909,  gave  much  time  to  this  difficulty,  and 
the  evidence  taken  by  that  committee  goes  to  show  that  much 
needs  to  be  done  in  making  the  uniform  accounts  really  as  useful 
as  they  should  be.  Indeed,  this  committee  was  convinced  that 
unless  some  permanent  machinery  is  established  to  define  the 
scope  of  the  various  headings  and  to  decide  authoritatively  from 
time  to  time  the  questions  of  detail  which  must  arise  in  this  con- 
nection, much  of  the  value  of  the  uniform  system  of  accounts 
would  be  lost ;  and  they  accordingly  recommended  the  formation 
of  a  standing  committee,  to  be  appointed  by  the  Board  of  Trade, 
which  should  include  representatives  of  the  railway  companies, 
to  decide  on  points  arising  in  connection  with  the  preparation  of 
the  accounts  and  statistical  returns.83 

This  departmental  committee  also  recommended  that  "in  the 
interest  both  of  the  railway  companies  themselves  and  of  the  gen- 
eral public"  a  system  of  yearly  accounts  and  statistical  returns 
should  be  substituted  for  the  present  system  of  half-yearly  ac- 
counts. It  further  recommended  that  a  uniform  date  should  be 
adopted  to  close  the  financial  year  of  all  the  companies,  instead 
of  permitting  each  company  to  adopt  its  individual  date. 

Furthermore,  this  committee  took  great  pains  in  preparing  a 
set  of  forms  for  financial  accounts  and  returns,84  with  the  aim 
of  meeting  the  changed  circumstances.  Special  effort  was  made 

ss  For  this  and  other  recommendations  of  this  departmental  committee, 
see  its  report,  pp.  1-6. 

s*  Those  interested  in  railway  accounting  will  find  their  time  well  spent 
in  examining  the  forms  which  are  to  be  found  in  appendix  I  of  the  com- 
mittee's report. 


171]  THE   REGULATION   OF   RAILWAY   ACCOUNTS  171 

to  exclude  from  the  financial  statements  all  matters  of  a  purely 
statistical  nature,  thus  making  a  strict  division  between  the 
financial  and  statistical  parts  of  the  returns  which  did  not  exist 
in  the  statutory  forms  then  in  force. 

A  bill  was  introduced  into  the  House  of  Commons  in  1910,  to 
give  effect  to  most  of  the  recommendations  made  in  the  report  of 
this  departmental  committee,  but  was  withdrawn  in  consequence 
of  the  dissolution  of  Parliament. 

From  the  foregoing,  we  have  seen  that  England  endeavored  to 
regulate  the  accounts  of  railways,  to  some  extent,  from  the  be- 
ginning, but  prior  to  1868,  the  companies  were  practically  free 
to  keep  their  accounts  in  their  own  way.  The  panic  of  1867  and 
other  events  led  Parliament  to  adopt  a  definite  and  uniform  sys- 
tem of  accounts  twenty  years  before  the  United  States  attempted 
to  regulate  railway  accounting  in  any  definite  way.  England, 
however,  made  no  further  progress  after  her  early  start.  Be- 
tween 1868  and  1909  nothing  was  done  to  improve  the  old  sys- 
tem, whose  defects  are  many  and  obvious.  During  this  time  the 
United  States  made  some  remarkable  advancements  in  railway 
accounting  and  its  regulation.  The  measures  adopted  by  the 
Interstate  Commerce  Commission  toward  the  unification  of  rail- 
way accounting  and  statistical  returns,  which  met  with  consider- 
able opposition  at  first,  are  gradually  becoming  more  popular 
and  have  unquestionably  done  much  good.  In  fact  the  report 
and  recommendations  of  the  departmental  committee  of  1909 
have  been  greatly  influenced  by  the  system  of  accounts  adopted 
by  the  Interstate  Commerce  Commission.  It  is  hoped  that  Par- 
liament may  soon  see  fit  to  give  more  serious  consideration  to 
these  recommendations. 

Since  writing  the  foregoing,  the  Railway  Companies  (Ac- 
counts and  Returns)  Act  of  1911  has  been  enacted.  This  act  is 
based  largely  upon  the  recommendations  of  the  departmental 
committee  of  1909. 

At  a  glance,  one  can  see  that  the  act  and  its  forms  of  accounts 
are  a  decided  improvement  over  that  of  1888.  The  half-yearly 
accounts  are  changed  into  annual  accounts,  which  experience  has 
unquestionably  proven  to  be  the  right  thing.  The  forms  are 
much  more  detailed  and  precise  than  the  former  ones.  This  is 


172  RAILWAY   FINANCE  IN   ENGLAND  [172 

especially  true  with  regard  to  the  revenue  accounts.  The  intro- 
duction of  the  appropriation  account  is  a  decided  improvement. 
The  separation  of  the  various  expenses  of  operation  and  main- 
tenance according  to  their  nature  are  incomparably  more  dis- 
tinct and  detailed  than  those  of  1886. 

Another  notable  improvement  is  the  equalization  of  the  re- 
ceipts and  expenses  of  the  different  auxiliary  operations.  These 
auxiliary  operations  are  of  an  entirely  different  nature  from 
that  of  the  general  railway  business.  Chief  among  this  may  be 
mentioned  form  No.  11  which  shows  the  receipts  and  expenses  in 
respect  of  omnibuses  and  other  passenger  vehicles  not  running 
on  the  railway,  No.  12,  receipts  and  expenses  in  respect  of  steam- 
boats, No.  15,  receipts  and  expenses  in  respect  of  hotels,  and  of 
refreshment  rooms  and  cars  where  catering  is  carried  on  by  the 
companies.  Each  of  these  forms  a  distinct  auxiliary  service  of 
its  own  kind  and  each  service  has  its  own  head  and  staff.  To 
separating  the  receipts  and  expenses  of  each  service  from  those 
of  the  rest,  not  only  the  general  manager  of  the  whole  undertak- 
ing may  be  better  enabled  to  watch  the  whole  situation  and  meas- 
ure the  efficiency  of  his  men,  but  the  individual  heads  of  the  dif- 
ferent services  will  also  be  impressed  more  effectively  with  their 
responsibility.  By  separating  the  accounts  of  the  different  ser- 
vices and  allocating  the  items  of  revenues  and  expenses  to  the 
respective  officers  responsible  for  the  items,  the  company  will  do 
much  to  encourage  economy  and  efficiency.  "With  the  same  idea 
in  view,  wages  are  separated  from  costs  of  materials  and  office 
expenses.  With  the  multiplication  of  the  activities  of  a  modern 
railway,  such  a  system  of  segregation  is  imperative  to  successful 
management. 

We  must  observe,  however,  that  improved  as  it  was,  the  act 
still  has  many  defects  which,  in  our  opinion,  could  be  advan- 
tageously avoided.  First  of  all  it  may  be  mentioned  that  the 
leave  given  to  end  the  financial  year  other  than  on  the  same  date 
is  not  going  to  prove  advantageous.  To  close  the  accounts  on 
the  same  date  is  of  fundamental  importance  to  realize  fully  the 
advantages  of  a  uniform  system  of  accounts^  which  was  one  of 
the  chief  reasons  for  passing  the  bill.  In  any  act,  loopholes  or 
exceptions  to  the  general  rule  can  hardly  be  expected  to  do  more 
good  than  evil. 


173]  THE  REGULATION  OF  RAILWAY  ACCOUNTS  173 

Another  defect,  which  we  feel  is  a  serious  one,  is  the  lack  of 
any  definite  and  detailed  classification  of  the  different  items  of 
accounts.  It  may  be  recalled  that  one  of  the  chief  aims  of  the 
departmental  committee  of  1909  was  to  secure  uniformity.  But 
we  may  be  permitted  to  say  that  uniformity  in  accounting  can 
not  be  easily  achieved.  The  uniformity  in  the  headings  of  ac- 
counts cannot  be  expected  to  insure  the  uniformity  in  what  may 
be  put  under  each  heading  by  the  different  railways.  While  the 
accountants  may  be  reasonably  expected  to  put  the  most  obvious 
items  under  the  proper  heads  of  accounts,  they  may  quite  as 
reasonably  be  expected  to  interpret  the  less  obvious  items  —  of 
which  there  are  numerous  in  the  enterprises  of  a  railway  —  in 
different  ways.  To  sustain  this  statement,  it  may  be  recalled 
that  the  Regulation  of  Railway  Act,  1868,  prescribed  a  form  of 
accounts  for  all  railways,  yet  at  the  time  of  the  revision  in  1913, 
following  the  act  of  1911,  there  were  innumerable  differences  be- 
tween the  accounts  of  one  company  and  those  of  another.  Al- 
though the  present  forms  of  accounts  are  far  more  detailed  and 
specific  than  those  of  former  years,  there  is  nevertheless  ample 
room  for  differences  in  the  allocations.  It  is  understood  that  the 
Standing  Committee  of  Accountants,  under  the  Railway  Clear- 
ing House  regulations,  has  prepared  an  annotated  form  of  ac- 
counts, but  it  is  not  generally  accessible  to  the  shareholder  or 
the  general  public.  This,  in  the  opinion  of  the  writer,  is  a  de- 
fect. The  said  annotated  classifications  or  something  similar  to 
it  should  be  prepared  and  promulgated  by  government  authority 
which  should  be  strictly  followed  by  the  railways  and  accessible 
to  all  interested  parties,  instead  of  keeping  it  under  the  veil  of 
secrecy.  Publicity  and  openness  is  the  foundation  of  public  con- 
fidence. Therefore  it  is  publicity  that  government  regulation 
should  emphasize.  In  the  long  run,  the  railways  and  all  other 
parties  concerned. will  have  everything  to  gain  and  little  to  lose 
by  adopting  such  a  policy  of  publicity.  There  seems  to  be  con- 
siderable apprehension  against  such  an  open  policy,  but  we  feel 
the  anticipated  dangers  are  visionary  rather  than  real.  Given  a 
fair  trial,  publicity  wrill  surely  find  its  own  favorable  position  in 
railway  finance  and  regulation. 

The  above  is  only  an  inadequate  observation.  To  give  full 
consideration  to  the  act  would  require  at  least  a  separate  chap- 


174  RAILWAY   FINANCE   IN   ENGLAND  [174 

ter.  As  the  act  was  passed  after  this  monograph  was  written, 
the  writer  prefers  to  limit  himself  to  this  short  analysis.  It  is 
recommended  that  every  student  interested  in  accounting  will 
find  it  of  great  advantage  to  make  a  thorough  examination  and 
detailed  comparison  of  the  different  forms  of  accounts  as  set 
forth  in  the  accounts  of  1886  and  1911. 


CHAPTER  VIII 
STATE  AUDITING  AND  INSPECTION 

Parliament  has  required  from  the  beginning  an  authentic  audit 
of  railway  accounts  by  the  railway  companies  themselves.  It  has 
also  adopted  elaborate,  although  ineffective,  regulations  govern- 
ing such  auditing  by  the  companies.  Thus  in  the  Companies 
Clauses  Act,  1845,  numerous  provisions  were  made  governing  the 
appointment  and  duties  of  auditors,  etc.1  The  substance  of  these 
rules  may  be  briefly  summed  up  as  follows : 

Unless  otherwise  provided  by  the  company's  special  act,  the 
shareholders  at  the  first  meeting  after  the  incorporation  of  the 
company  should  elect,  either  in  person  or  by  proxy,  the  pre- 
scribed number  of  auditors,2  in  like  manner  as  in  the  case  of  the 
election  of  the  directors.  One  of  the  auditors,  to  be  determined 
in  the  first  instance  by  ballot  between  themselves  or  in  any  other 
way  suitable  to  themselves  and  afterwards  by  seniority,  should 
retire  at  the  end  of  the  first  ordinary  meeting  in  each  year ; 3  and 
this  annual  vacancy  should  be  filled  by  election  at  the  same  meet- 
ing. If  no  other  qualifications  were  required  by  the  special  act, 
every  auditor  should  have  at  least  one  share  in  the  undertaking, 
and  should  not  hold  any  other  office  in  the  company  nor  should 
he  "be  in  any  other  manner  interested  in  its  concerns,  except  as 
a  shareholder." 

In  regard  to  the  duties  and  powers,  the  act  stipulated  that  the 
auditors  should  receiye  and  examine  all  the  half-yearly  or  other 
periodical  accounts  and  balance  sheets  of  the  company,  which 
should  be  delivered  to  them  by  the  directors  at  least  fourteen 
days  before  the  ensuing  ordinary  meeting  at  which  these  ac- 
counts, etc.,  were  to  be  produced  to  the  shareholders.  They  were 
also  required  either  to  make  a  special  report  or  simply  to  con- 

1  8  V.  c.  16,  SB.  101-108. 

2  If  no  number  is  prescribed,  then  two  would  be  the  number. 

3  Each  auditor  should  be  immediately  eligible  to  reelection. 

175 


176  RAILWAY   FINANCE   IN   ENGLAND  [176 

firm  the  accounts,  etc.,  submitted.  Furthermore,  these  reports 
or  confirmations  together  with  the  reports  of  the  directors  should 
be  read  at  the  meeting.  In  performing  their  duties,  the  auditors 
were  empowered  to  employ  at  the  company's  expense  such  ac- 
countants and  other  persons  as  they  might  deem  proper. 

After  the  financial  disaster  of  1847,  general  proposals  con- 
cerning the  auditing  of  railway  accounts  were  made,  but  no  re- 
sult was  obtained  from  these  attempts.  In  1848  a  bill  was  sent 
down  from  the  upper  house  of  Parliament,  in  which  it  was  pro- 
posed that  on  the  requisition  of  a  certain  number  of  sharehold- 
ers who  were  ready  to  deposit  £200  to  meet  the  expense,  the  gov- 
ernment should  appoint  impartial  persons  as  auditors.  The 
principal  object  of  the  bill  was  to  protect  the  minority.  It  was 
urged  that  as  the  directors  were  elected  by  majority,  if  the  aud- 
itors were  also  elected  by  the  same  majority,  the  check  would 
be  imperfect.4  This  measure  was  opposed  however,  on  the  ground 
that  there  was  no  demand  for  it  by  railway  shareholders,  that  it 
is  very  questionable  whether  Parliament  had  any  right  to  inter- 
fere with  private  business,  and  that  one  might  just  as  well  have 
an  audit  of  the  accounts  of  the  Bank  of  England.5  After  con- 
siderable discussion  in  the  House  of  Commons,  it  was  finally 
rejected. 

But  the  financial  difficulties  of  the  railways  were  too  apparent 
to  escape  the  attention  of  Parliament.  A  select  committee  was 
appointed  by  the  House  of  Lords  in  1849  to  consider  ' '  Whether 
the  railway  Acts  do  not  require  amendment,  with  a  view  of  pro- 
viding for  a  more  effectual  system  —  audit  accounts,  to  guard 
against  the  application  of  funds  as  such  companies  to  purposes 
for  which  they  were  not  subscribed,  under  the  authority  of  the 
legislature. ' ' 6  This  committee  recommended  that  the  right  of 
inspection  by  shareholders  of  the  accounts  should  be  unrestrain- 
ed: that  all  account,  without  exception,  touching  or  relating  to 
the  receipts  or  payment  of  the  company  should  be  required  to  be 
produced;  and  that  in  case  of  refusal  the  statutory  penalty 
should  be  extended  from  the  bookkeeper  to  the  governing  body. 
The  committee  further  recommended  that  the  restriction  upon 

*  Hansard,  98 :  1143-1147. 

s  Hansard,  187 :  1589-1590. 

e  Report  of  Eoyal  Commission  on  Eailways,  1867,  p.  xviii. 


177]  STATE    AUDITING    AND    INSPECTION  177 

selecting  auditors  from  among  the  shareholders  should  be  re- 
pealed, and  that  the  auditors  should  be  empowered  to  call  for  all 
books  and  documents  of  the  company  necessary  to  elucidate  not 
only  the  balance  sheet,  but  the  entire  whole  financial  condition 
of  the  company.  Moreover,  the  committee  also  urged  that  the 
government  should  name  one  auditor  to  act  in  conjunction  with 
two  auditors  to  be  named  by  the  company ;  and  that  if  the  gov- 
ernment auditor  differed  in  opinion  from  the  company's  audi- 
tors, his  opinion  should  be  recorded  and  published  with  the 
accounts  for  the  information  of  the  shareholders. 

Bills  embodying  some  of  these  provisions  were  introduced  in- 
to Parliament  in  subsequent  sessions,  but  none  of  them  became 
law  until  1868. 

In  1851  the  railway  companies  themselves  brought  in  an  audit 
bill,  proposing  to  appoint  a  board  of  auditors  elected  by  share- 
holders. The  president  of  the  Board  of  Trade  objected  to  the 
proposal,  on  the  ground  that  it  would  make  the  people  judges  in 
their  own  case  and  that  such  a  tribunal  lack  independence  and 
continuity.  The  last  proposal  made  to  the  House  of  Commons 
up  to  1867  was  that  the  railway  companies  should  elect  a  body 
of  300  persons,  out  of  which  five  auditors  should  be  chosen  to 
hold  their  places  during  good  behavior.  It  was  proposed  that 
the  debenture  holders  should  also  take  part  in  the  election.  No 
legislation,  however,  sprang  from  these  bills.7 

Thus  up  to  1857  the  main  objects  aimed  to  be  secured  by  Par- 
liamentary action  may  be  summed  up  as  follows : 8 

(1)  A  clear  and  faithful  record  and  account  of  all  the  finan- 
cial transaction  of  the  company. 

(2)  Authority  for  shareholders  to  inspect  within  certain  fixed 
periods  the  company's  accounts  and  to  take  copies  or  extracts. 

(3)  The  appointment  of  auditors  from  among  the  sharehold- 
ers to  audit  the  balance  sheets  and  accounts. 

(4)  The  preparations  of  a  scheme  for  the  declaration  of  a 
dividend  to  be  paid  out  of  the  profits  of  the  company. 

For  the  purpose  of  securing  these  objects,  Parliament  adopted 
the  following  rules. 
Each  company  at  its  annual  meeting  should  appoint  two  audi- 

7  Hansard,  187:  1589-1590. 

s  Report  of  Royal  Commission  on  Railways,  1867,  p.  xliv. 


178  RAILWAY   FINANCE  IN   ENGLAND  [178 

tors,  one  of  whom  should  retire  annually  but  should  be  re-eligi- 
ble. 

The  directors  should  deliver  to  the  auditor  half-yearly  or  other 
periodical  accounts  and  balance  sheets  fourteen  days  before  the 
meeting  at  which  they  were  to  be  produced. 

The  auditors  should  receive  and  examine  the  same,  and  might 
employ  at  the  expense  of  the  company  such  accountants  and  oth- 
er persons  as  they  might  think  fit  to  assist  them.  They  should 
either  make  a  special  report  on  the  accounts  or  simply  confirm 
them. 

The  directors  should  keep  the  accounts  of  the  company.  The 
books  should  be  balanced  at  the  principal  periods,  and  there- 
upon the  exact  balance  sheet  be  made  up,  which  should  exhibit 
a  true  statement  of  the  capital  stock,  credits,  and  property  of 
every  description  belonging  to  the  company,  the  debts  due  by 
the  company,  as  well  as  a  distinct  view  of  the  profit  or  loss 
which  had  arisen  in  the  course  of  the  half  year.9 

The  application  of  these  provisions,  however,  was  by  no  means 
free  from  difficulty.  In  practice,  it  was  found  that  only  a  very 
short  summary  was  usually  laid  before  the  auditors,  who  made 
an  examination  of  it  within  a  very  limited  time.10  The  daily 
transactions  of  railway  companies  were  so  numerous  and  in- 
tricate that  the  company  was  compelled  to  employ  a  staff  of 
clerks  and  accountants  proportionate  to  the  magnitude  of  its 
business  in  order  to  examine  and  check  every  transaction  as 
it  took  place.  Since  the  manner  in  which  every  transaction 
was  debited  or  credited  depended  upon  the  orders  issued  at  the 
time  when  the  transaction  was  made,  the  accounts  could  be 
cheeked  efficiently  only  by  a  contemporaneous  audit  by  an  estab- 
lishment employed  in  the  same  office,  or  by  a  complete  transfer 
or  transcript  of  the  accounts,  vouchers,  correspondence,  minute 
books,  etc.,  to  be  examined  elsewhere.11  It  was  quite  competent 
for  the  shareholders  of  any  company  to  direct  their  auditors  to 
investigate  the  accounts  of  the  company  to  any  extent  they 
thought  necessary  after  the  accounts  were  rendered  each  half- 

*  Report  of  Royal  Commission  on  Railways,  1867,  p.  xliv. 

10  Economist,  May  16,  1857. 

11  Hid. 


179]  STATE   AUDITING    AND    INSPECTION  179 

year,  but  it  did  not  seem  to  be  within  their  power  to  direct  any 
continuous,  daily  audit. 

The  Royal  Commission  on  Railways,  1865-67,  however,  dis- 
covered that  in  many  cases,  especially  as  in  that  of  the  London 
and  North- Western,12  much  could  be  done  by  the  companies 
themselves  for  the  purpose  of  ensuring  a  supervision  and  effec- 
tive audit  in  the  interest  of  the  shareholders.  At  the  same  time, 
the  commission  pointed  out  that  the  powers  conferred  by  the 
Companies'  Clauses  Acts  were  manifestly  insufficient  for  this 
purpose,  in  case  the  directors  were  otherwise  disposed.13 

It  has  been  shown  in  a  previous  chapter  that  under  the  sys- 
tem of  independent  auditing  much  abuse  arose,  especially  in  the 
declaration  of  dividends  otherwise  than  out  of  net  profits.  It 
was  a  "striking  fact,"  said  the  London  Times,1*  "that  .  .  . 
the  auditors  have  never  discovered  or,  at  any  rate,  disclosed  any 
one  of  the  numerous  cases  of  ...  false  returns  to  the 
Board  of  Trade,  payments  of  unearned  dividends,  charging  of 
revenue  expenses  to  capital,  or  any  other  of  the  various  forms 
of  'cooking'  accounts  by  which  shareholders  have  been  lured  to 
ruin.  .  ." 

Therefore  it  was  again  urged  that  no  legislation  to  repress  the 
existing  abuses  would  be  of  any  avail  without  a  system  of  gov- 
ernment audit  of  the  companies'  accounts.15  On  the  other  hand 
the  Royal  Commission  apprehended  that  it  would  not  be  desir- 
able to  impose  upon  the  Crown  the  duty  of  auditing  the  accounts 
of  joint  stock  companies  and  to  certify  to  the  shareholders  the 
correctness  of  their  own  balance  sheets,  for  in  practice  this  would 
require  a  very  large  staff  of  officers  as  well  as  involve  very 
serious  responsibility,  merely  to  relieve  the  shareholders  of  a 
duty  which  they  could  well  perform  for  themselves  by  the  elec- 
tion of  competent  auditors  with  adequate  powers  and  sufficient 
remuneration.  But  this  commission  agreed  with  the  select  com- 
mittee of  1849  that  the  restriction  upon  selecting  auditors  from 
among  the  shareholders  should  be  repealed,  and  was  also  of  the 
opinion  that  the  auditors  should  be  empowered  to  carry  on  a 

12  Royal  Commission  on  Railways,  1865-74,  Appendixes  E-F. 

is  Ibid.,  1867,  p.  xlv. 

i*  London  Times,  November  3,  1867,  p.  4. 

is  Report  of  Royal  Commission  on  Railways,  1867,  p.  xliv. 


180  RAILWAY   FINANCE   IN   ENGLAND  [180 

continuous  audit  and  to  call  for  all  books  and  documents  neces- 
sary to  elucidate  not  only  the  balance  sheet,  but  the  whole  finan- 
cial position  of  the  company.16 

In  commenting  on  the  report  of  the  Royal  Commission  regard- 
ing government  audit  of  railway  accounts,  the  Economist  stat- 
ed,17 "These  remarks  seem  to  us  full  of  wisdom.  The  attempt 
to  separate  the  accountant  from  the  transactor  will  fail,  unless 
pursued  into  the  minutest  details.  The  man  who  does  the  busi- 
ness will  give  what  accounts  of  it  he  pleases. ' ' 

The  general  chaotic  condition  of  railway  finance  which  has 
been  repeatedly  referred  to  and  the  recommendations  of  the 
Royal  Commission  led  Parliament  to  insert  a  clause  in  the  Rail- 
way Companies  Act,  1867,18  giving  to  the  shareholders  a  control 
through  the  auditors,  and  imposing  on  the  auditors  a  respon- 
sibility which  they  never  had  before.  This  clause  provided,  as 
briefly  stated  in  a  previous  chapter,  that  no  dividend  should  be 
declared  by  a  company  until  the  auditors  had  certified  that  the 
half-yearly  accounts  contained  a  full  and  true  statement  of  the 
financial  condition  of  the  company,  and  that  the  proposed  divi- 
dend was  bona  fide  due  after  charging  the  revenue  of  the  half- 
yearly  with  all  expenses  which  might  be  paid  out  of  such  revenue 
in  the  opinion  of  the  auditors.  The  auditors  were  empowered 
to  examine  the  books  of  the  company  at  all  reasonable  times, 
and  to  call  for  such  further  accounts,  vouchers,  papers,  etc.,  as 
they  saw  fit.  They  were  also  empowered  to  refuse  to  certify 
any  accounts  or  statements  of  the  company  until  the  directors 
and  officers  of  the  company  had  produced  the  required  accounts 
and  given  their  assistance  as  far  as  they  could.  Furthermore, 
the  auditors  might  at  any  time  add  anything  to  their  certificates 
or  issue  to  the  shareholders  independently  at  the  expense  of  the 
company,  any  statement  respecting  the  financial  condition  and 
prospects  of  the  company  which  they  thought  important  for  the 
information  of  the  shareholders. 

Under  the  existing  circumstances  when  every  imaginable  mys- 
tification was  thrown  over  the  declaration  of  dividends,  when 
auditors  never  disclosed  any  of  the  numerous  serious  irregular- 

16  Ibidf>  1867,  p.  xlv. 

17  Economist,  May  18,  1867. 
is  30  &  31  V.  e.  127,  s.  30. 


181]  STATE    AUDITING   AND    INSPECTION  181 

ities,  and  when  general  confusion  seemed  to  hang  over  the  finan- 
cial affairs  of  the  whole  system,  it  was  natural  that  the  clause 
was  highly  valued  at  the  time  of  its  passage.  It  was  expected, 
not  without  reason,  that  henceforth  the  auditors  would  no  longer 
have  any  excuse,  when  actions  were  brought  against  them  for 
neglect  of  duty.19 

So  far  so  good.  But  in  the  act  a  further  provision,  as  re- 
ferred to  before,20  was  made  to  the  effect  that  in  the  declaration 
of  dividends  and  auditing  of  accounts,  if  the  directors  differed 
from  the  judgment  of  the  auditors  with  respect  to  the  payment 
of  any  expenses  of  the  company,  such  difference  should,  ' '  if  the 
directors  desire  it, " 21  be  stated  in  the  report  to  the  sharehold- 
ers, "and  the  company  in  general  meeting  may  decide  thereon, 
subject  to  all  the  provisions  of  the  law  then  existing,  and  such 
decision  shall  for  the  purpose  of  the  dividend  be  final  and  bind- 
ing." This  provision  proved  to  be  a  loop-hole  through  which 
the  expected  usefulness  of  the  system  of  auditing,  as  shown  in  a 
previous  chapter,  was  practically  nullified.  .  *' 

As  the  systems  of  auditing  adopted  in  1845  and  1867  both 
failed  to  be  effective  enough  to  restore  confidence,  it  was  sug- 
gested that  a  committee  of  investigation  might  be  effective  in 
settling  the  existing  difficulties.  But  it  was  at  onoe  compre- 
hended that  the  nature  and  composition  of  such  committees  of 
railway  companies  would  prevent  them  from  doing  anything 
effective.  They  could  be  composed  in  all  kinds  of  ways,  they 
could  lay  down  every  species  of  doctrine,  and  they  could  accept 
as  well  as  deny  all  sorts  of  statements.  The  investigation  of 
railway  affairs  was  recognized  as  a  difficult  task  even  for  an  ex- 
pert, and  the  task  wholly  surpassed  the  power  of  any  untrained 
man.22 

Moreover,  experience  had  taught  that  a  committee  of  investi- 
gation was  almost  never  both  able  and  impartial.  All  the  com- 
petent people  in  a  railway  company,  it  was  told,  took  a  side 
either  for  the  directors  or  against  them,  and  they  would  go  into 
the  committee  with  a  bias  in  their  minds.  Thus,  in  practice,  the 

is  London  Times,  November  13,  1867,  p.  4. 

20  Cf.  supra,  p.  216. 

21  Italics  are  mine. 

22  Economist,  December  21,  1867. 


182  RAILWAY   FINANCE   IN   ENGLAND  [182 

reports  of  committees  of  investigation  were  either  questioned  or 
denied.  They  often  would  "not  settle  so  much  as  they  unset- 
tle. .  .,"  and  they  would  "only  add  a  new  disputant  and  a 
new  set  of  contested  figures"  to  the  controversy.23 

Therefore,  it  appeared  that  the  true  remedy  for  the  lack  of 
confidence  was  an  independent  audit  of  all  the  railway  ac- 
counts.24 The  government  was  urged  to  exercise  what  philoso- 
phers called  the  "function  of  verification."  The  railways,  by 
which  alone  people  could  travel  and  traffic  could  be  conveyed, 
were  regarded  not  only  of  sufficient  magnitude  to  justify  the 
action  of  the  government,  but  so  important  that  the  state  would 
be  to  blame  if  it  did  not  act.  The  government  was  held  as  the 
only  uniform  authenicator  possible  —  the  only  one  which  could 
apply  the  same  measure  with  the  same  weight  to  all  railways  in 
the  country.  The  shareholders  themselves  were  reported  to  be 
desirous  of  having  a  system  of  government  audit  and  were 
ready  to  share  the  expenses.  "An  optional  audit  of  petitioning 
railways  is,"  said  the  Economist,25  "both  on  grounds  of  theory 
and  reasons  of  practice,  the  sole  outlet  from  the  existing  diffi- 
culty." In  fact,  during  the  early  part  of  1867  several  proposals 
were  presented  to  the  Board  of  Trade,  which,  though  varying 
much  in  detail,  contained  the  common  recommendation  that  an 
auditor  should  be  appointed  by  that  department  to  audit  rail- 
way accounts.26  Consequently  in  the  Regulation  of  Railways 
Bill  of  1868,  provisions  were  made  for  a  more  effective  system 
of  auditing  and  inspection.  When  the  bill  was  introduced,  it 
was  generally  conceded  that  a  system  of  government  audit  of 
railway  accounts  would  do  much  toward  restoring  confidence. 
But  it  was  also  recognized  that  in  this  very  matter  of  restoring 
confidence  lay  the  danger  of  the  system.  The  public  might  place 
too  much  faith  in  the  system.  They  might  be  led  to  believe  that 
the  soundness  of  a  company's  proceedings  and  finance  were 
certified  and  even  guaranteed  by  the  government.  Again  it  was 
recognized  that  it  was  by  no  means  an  easy  work  for  the  gov- 
ernment to  audit  efficiently  and  effectively  the  accounts  of  the 

23 /bid.,  December  28,  1867. 

24  Ibid., 

25  Economist,  December  21,  1867. 

26  Hansard,  187 :  1590. 


183]  STATE   AUDITING   AND   INSPECTION  183 

railway  companies.  An  audit  of  business  "from  without "  must 
be  such  as  would  be  of  avail  against  directors  who  desired  to 
deceive.  The  details  which  auditors  in  such  cases  would  have 
to  look  into  and  the  minuteness  of  the  evidence  they  would  have 
to  inspect,  it  was  urged,  could  hardly  be  properly  appreciated 
by  any  but  those  who  had  practical  experience  in  such  matters.21 

On  account  of  the  possible  dangers  and  the  great  difficulties 
which  might  arise  from  a  system  of  government  audit,  it  was 
suggested  that  railways  themselves  might  constitute  a  central 
board  of  audit,  and  that  they  might  for  that  purpose  make  use 
of  the  existing  machinery  of  the  Railway  Clearing  House.28 
Such  a  board  under  the  control  of  the  railways  themselves,  it 
was  believed,  would  be  less  likely  to  give  false  security  than  an 
audit  under  the  government.29 

The  most  important  question  which  arose  during  the  discus- 
sion, however,  was  that  as  to  what  should  be  the  scope  of  the 
audit.  An  ordinary  audit,  such  as  the  mere  comparison  of 
payments  and  vouchers,  was  an  operation  which  did  not  give 
the  protection  which  shareholders  sometimes  fancied  it  did. 
On  the  other  hand  it  did  not  appear  politic  to  interfere  too  much 
with  the  policy  of  railway  companies.  If  the  government  should 
give  guarantee  to  all  the  railway  accounts  presented  to  the 
Board  of  Trade,  the  various  companies  of  other  pursuit  might 
make  similar  demands.30 

After  much  debate,  provisions  were  made,  in  the  act  of  1868, 
to  repeal  the  restriction  imposed  by  the  Companies  Clauses  Act, 
1845,  that  auditors  should  be  shareholders,  for  the  reason  that 
it  had  proven  desirable  in  some  cases  to  have  independent  audi- 
tors who  should  be  entirely  unconnected  with  the  company.31 

But  what  was  entirely  new  and  of  great  importance  was  the 
provision  for  the  appointment  of  auditors  by  the  Board  of 
Trade.  According  to  this  provision,  the  Board  of  Trade,  upon 
application  made  in  pursuance  of  a  resolution  passed  at  a  meet- 
ing of  the  directors  or  at  a  general  meeting  of  the  company, 

27  Economist,  May  18,  1867. 

28  Sir  Geo.  Findlay  's  book  on  the  Working  and  Management  of  an  Eng- 
lish Railway  has  an  excellent  treatment  of  the  Clearing  House. 

2»  Hansard,  187:  1591. 
so  Ibid.,  191:  1538. 
si  Hansard,  190:  1858. 


184  RAILWAY   FINANCE  IN   ENGLAND  [184 

might  appoint  an  auditor  in  addition  to  the  two  auditors  of  the 
applying  company,  and  such  government  auditors  were  to  be 
paid,  by  the  applying  company,  a  reasonable  remuneration  pre- 
scribed by  the  Board  of  Trade.  The  government  auditor  was 
to  have  the  same  duties  and  powers  as  the  companies'  auditors; 
and  the  company  might  declare  a  dividend  only  when  the 
majority  of  these  three  auditors  had  certified  that  such  dividend 
was  properly  earned  according  to  the  rules  laid  down  in  section 
30  of  the  Railway  Companies,  1867. 

It  was  regretted,  however,  that  the  act  provided  for  only  one 
government  auditor  in  each  case  where  the  company  had  two. 
As  a  majority  was  to  decide  when  a  dividend  might  be  declared, 
it  was  apprehended  that  the  official  auditor  might  be  overruled. 
Then  he  would  only  have  the  liberty,  according  to  the  act,  of 
printing  his  protest  at  the  expense  of  the  company.  Even  ad- 
mitting that  the  possibility  of  such  a  protest  would  be  an  ob- 
stacle in  the  way  of  improper  dividends  and  that  the  govern- 
ment auditor  might  receive  more  consideration  than  those  of  the 
company,  nevertheless  it  remained  a  fact  there  were  many  dis- 
putes in  which  the  shareholders  and  the  capitalists  might  be 
indisposed  to  give  the  government  auditor  their  proper  sup- 
port.32 

It  was  also  urged  both  in  and  out  of  Parliament 33  that  audit- 
ing alone  was  not  sufficient  to  prevent  disorders  in  railway 
finance,  for  frequently  the  books  of  unreliable  companies  were 
well  kept.  The  root  of  the  evil  was  in  the  charging  of  the  vari- 
ous items  in  the  books. 

Another  important  provision  contained  in  the  Railway  Regu- 
lation Act  of  1868  was  that  in  case  there  were  any  difference  of 
opinion  between  the  auditors,  then  it  should  be  imperative,  in- 
stead of  permissive,  as  was  originally  provided  in  the  bill,  that 
the  dissenting  auditor  should  issue  to  the  shareholders,  at  the 
cost  of  the  company,  a  statement  containing  the  grounds  on  which 
he  differed  from  his  colleagues  and  prepare  such  other  state- 
ments respecting  the  financial  conditions  and  prospects  of  the 
company  which  he  deemed  material  for  the  information  of  the 
shareholders.34 

32  Economist,  March  21,  1868. 

33  Hansard,  190 :  1960,  and  London  Times,  November  22,  1867,  p.  6. 
a*  Hansard,  190:  1962. 


185]  STATE    AUDITING   AND    INSPECTION  185 

To  strengthen  the  position  of  the  securities-holders,  the  act 
further  provided  35  that  the  directors,  or  two-fifths  of  the  holders 
of  shares,  stocks,  or  preference  shares,  or  half  of  the  creditors, 
might  apply  to  the  Board  of  Trade  to  appoint  inspectors  to  ex- 
amine a  company's  affairs,  in  case  they  produced  evidence  to 
satisfy  the  Board  of  Trade.  In  so  applying  to  the  Board  of 
Trade  the  applicants,  however,  were  required  to  meet  all  ex- 
penses incurred  in  connection  with  the  inspection,  unless  the 
Board  of  Trade  should  direct  the  same  or  any  portion  thereof 
to  be  borne  by  the  company,  and  they  might  also  be  required  to 
give  security  for  the  payment  of  such  expenses. 

The  government  inspectors  were  empowered  to  examine  all 
the  company's  books,  documents,  etc.,  as  well  as  to  administer 
oath ;  and  the  directors,  officers  and  agents  of  the  company  were 
required  to  produce,  for  the  examination  of  the  government  in- 
spection, all  such  books  and  documents.  The  latter  were  also 
required  under  penalty  36  to  render  to  the  government  inspectors 
all  reasonable  facilities  for  discharging  his  duty. 

Upon  the  conclusion  of  the  examination,  the  inspectors  were 
to  report  their  opinion  both  to  the  Board  of  Trade  and  the  com- 
pany, the  latter  being  required  to  print  and  deliver  a  copy  of 
the  same  to  the  Board  of  Trade  as  well  as  to  every  applicant  who 
held  any  securities  of  the  company. 

Furthermore,  the  companies  were  authorized  to  appoint,  on 
their  own  accord,  at  any  extraordinary  meeting  inspectors  for 
the  purpose  of  examining  into  the  company's  affairs,  and  such 
inspectors  of  the  company  were  to  have  the  same  powers  and  to 
perform  the  same  duties  as  those  appointed  by  the  Board  of 
Trade. 

This  system  of  inspection  was  adopted  for  the  purpose  of 
helping  the  shareholders  to  bring  into  their  proper  light  without 
involving  the  assumption  of  any  serious  responsibility  by  the 
government.37  Such  inspection  of  private  business  did  not  es- 
tablish any  new  principles,  as  a  similar  system  had  been  intro- 

ss  31  &  32  V.  c.  119,  as.  6-10. 

36  In  ease  any  director,  officer,  or  agent  of  the  company  should  refuse  to 
produce  any  books  or  documents,  or  to  deny  the  facilities  necessary  for  the 
inspection,  he  should  be  held  liable  to  a  penalty  of  £5  for  every  day  during 
which  the  refusal  continued.     See  sections  8  &  10,  31  &  32  V.  c.  119. 

37  Hansard,  190 :  1958. 


186  RAILWAY   FINANCE  IN   ENGLAND  [186 

duced  by  the  Companies  Act  of  1862,  in  the  case  of  ordinary 
joint  stock  companies.38 

The  defect  of  this  system  of  government  inspection,  as  was 
pointed  out  at  the  time,39  was  that  the  inspection  was  contem- 
plated only  in  extreme  cases.  The  limitations  placed  upon  the 
application  for  government  inspection  were  said  to  be  too  cum- 
bersome. It  was  urged  that  since  the  applicants  were  required 
to  give  security  for  the  cost  of  any  government  inspection,  Par- 
liament could  have  well  afforded  to  require  the  consent  of  a 
smaller  proportion  of  the  shares  or  debentures  of  a  company  for 
any  inspection.40  It  would  be  almost  impossible  to  make  any 
such  inspection  if  a  directorate  objected  to  it.  The  demand  for 
an  examination  of  a  company's  affairs,  according  to  the  pro- 
vision, would  be  a  penal  proceeding  which  the  directors  would 
always  resist.  It  would  be  made,  therefore,  only  when  a  railway 
came  to  grief,  while  what  was  needed  was  a  government  inspec- 
tion when  the  soundness  of  the  company  was  not  suspected  and 
not  merely  an  inquiry  when  troubles  had  taken  place. 

Moreover,  in  spite  of  the  great  responsibility  placed  upon  the 
Board  of  Trade,  no  principle  was  laid  down  to  guide  that  body, 
as  to  what  reasons  were  sufficient  to  justify  an  inquiry.  Neither 
was  there  any  specific  rule  as  to  the  kind  of  evidence  on  which 
it  should  insist.  Thus,  it  was  apprehended  that  "the  act  might 
be  wholly  unworkable  if  the  Board  of  Trade  were  judicial  and 
exacting,  and  looked  too  narrowly  into  prima  facie  cases.  '  '  41 

It  was,  however,  conceded  that  the  provision  for  the  appoint- 
ment of  government  inspectors  would  generally  be  of  some  use 
in  that  the  possibility  of  a  searching  inquiry  would  have  much 
indirect  influence  over  directors.42 

In  spite  of  its  defects,  however,  the  system  of  government 
audit  and  inspection  was  recognized  to  be  a  forward  movement 
in  the  regulation  of  railway  finance.  The  holders  of  the  securi- 
ties of  the  companies  were  at  least  afforded  a  chance  to  get 
government  auditors  and  inspectors  to  act  with  their  own,  thus 
bringing  pressure  to  bear  upon  the  directors.  All  good  compan- 


39  Economist,  August  29,  1868,  p.  992. 

40  Ibid.,  March  21,  1868. 

41  Ibid.,  August  29,  1868,  p.  992. 

42  Economist,  March  21,  1868. 


187]  STATE   AUDITING   AND    INSPECTION  187 

ies  would  gain  by  taking  advantage  of  the  provisions  of  the 
act;  and  the  "fashion"  being  once  established  might  compel 
companies  to  follow  the  example.  The  discredit  arising  from 
shutting  out  the  light  might  be  even  worse  than  the  discredit  of 
the  unwelcome  truth  itself.  Although  the  system  of  government 
audit  and  inspection  has  been  resorted  to  only  occasionally,  it 
appears  to  have  proven  beneficial.  Parliament  has  not  only  re- 
tained the  system  of  impartial  audit,  but  has  given  it  special 
emphasis.43  Indeed,  as  said  a  member  of  the  New  York  Bureau 
of  Economic  Research  in  1901  before  the  United  States  Indus- 
trial Commission,44  the  English  auditors  are  independent  and 
form  "almost  a  fourth  body  —  a  fourth  cog  in  the  wheel  of 
government."  The  fact  that  the  government  has  the  power  to 
appoint  its  own  auditors  to  audit  the  accounts  and  to  appoint 
inspectors  to  examine  the  affairs  of  the  companies  seemed  to 
have  considerable  influence  in  preventing  railway  companies 
from  many  irregularities.  Thus  it  appears  that  the  mere  reser- 
vation by  the  government  of  certain  important  privileges  may 
often  prove  quite  effective  in  checking  misconducts,  even  if  such 
privileges  are  seldom  made  use  of. 

It  may  be  added  that  as  years  progressed,  things  became  more 
settled  to  normal  or  ' '  standard ' '  conditions.  While  the  accounts 
of  some  companies  do  not  give  as  much  as  is  desirable,  they  are 
generally  known  to  be  true  and  straightforward,  and  seldom 
make  any  attempt  at  dishonest  concealment  of  vital  points.  The 
general  practice  is  that  they  are  audited  half-yearly.  Besides 
appointing  professional  auditors  on  behalf  of  the  shareholders, 
many  companies  have  an  audit  committee  appointed  for  the  lat- 
ter body,  which  meets  regularly  for  the  purpose  of  supervising 
the  accounts.  Perhaps  these  measures  taken  by  the  companies 
may  to  a  certain  extent  explain  why  the  privilege  given  by  the 
government  for  appointing  government  auditors  has  not  been 
taken  advantage  of  by  the  shareholders. 

43  In  the  "saving"  clause  of  the  Coventry  Bailway  Bill,  1910,  as  to 
general  Railway  Act,  the  only  two  topics  which  received  special  emphasis 
were  the  impartial  audit  of  accounts  and  the  revision  of  the  maximum  rates. 
See  sec.  43,  p.  17  of  the  Coventry  Railway  Bill,  1910. 

**Eeport  of  the  United  States  Industrial  Commission,  1901,  Vol.  IX, 
p.  93. 


BIBLIOGRAPHY 

STATUTES,  STANDING  ORDERS,  ETC. 

The  British  statutes  at  large,  1801-date. 

Bigg's  general  railway  acts,  1830-1898,  15th  ed.  Waterlow  & 
Sons,  Ltd.,  Lond. 

Liverpool  and  Manchester  Railway  bill,  1825,  Lond. 

Act  for  making  a  railway  from  the  London  &  Croydon  Rail- 
way to  Brighton,  1837. 

Standing  orders  of  the  House  of  Lords,  1906.  Wyman  & 
Sons,  Ltd.,  Westminster,  S.  W. 

Model  bills  and  clauses,  House  of  Lords,  1909. 

Hansard's  parliamentary  debates,  1803-1892,  series  1,  vols. 
1-41,  series  2,  vols.  1-25,  and  series  3,  vols  1-350. 

Coventry  railway  bill,  1910. 
REPORTS  OF  PARLIAMENTARY  COMMITTEES,  ETC. 

Report  of  the  select  committee  on  railway  bills,  with  evidence, 
1837.  (House  of  Commons). 

Report  of  the  select  committee  (House  of  Commons)  on  rail- 
way subscription  lists,  1837,  Parliamentary  Papers,  1837, 
v.  14. 

Report  of  the  select  committee  on  railways,  House  of  Com- 
mons, with  evidence,  London,  1844. 

Report  of  the  select  committee  on  railway  acts  enactments, 
1846,  House  of  Commons,  with  evidence. 

Reports  of  the  select  committees  of  1863  and  1864,  House  of 
Lords,  on  the  borrowing  powers  of  railway  companies,  with 
evidence. 

Report  of  the  select  committee  on  railway  companies'  powers, 
1864. 

Report  of  the  Royal  Commission  on  Railways,  1865-1867,  with 
evidence. 

Report  of  the  select  committee  on  railway  rolling  stock,  1872. 

188 


189]  BIBLIOGRAPHY  189 

Report  of  the  joint  select  committee  on  railway  companies 
amalgamation,  1872. 

Report  of  select  committee  on  railways,  1882.  Parliamentary 
papers,  1882,  vol.  13. 

Report  of  the  select  (hybrid)  committee,  House  of  Commons, 
on  the  Caledonian  Railway  (conversion  of  stock)  bill,  the 
Great  Northern  Railway  (capital)  bill,  the  London  &  South 
"Western  Railway  (conversion  of  stock)  bill,  and  the  Isle 
of  Wight  Railway  Bill,  with  evidence,  1890. 

Report  of  the  committees  appointed  by  the  Board  of  Trade 
on  the  forms  and  scope  of  the  accounts  and  statistical  re- 
turns rendered  by  railway  companies  under  the  Railway 
Regulation  Acts,  1909. 

Reports  of  the  Industrial  Commission,  United  States,  vols.  IV 
and  IX. 

Hearings  before  the  committee  on  interstate  commerce,  Unit- 
ed States  Senate,  1906.  U.  S.  Senate  documents,  No.  243, 
59th  Congress,  1st  session,  vols.  II-V. 

Report  of  select  committee  on  railways,  1867.     Parliamentary 

papers,  1867,  vol.  VIII. 
ANNUAL  REPORTS,  ETC. 

General  report  to  the  Board  of  Trade  in  regard  to  the  share 
and  loan  capital,  traffic  in  passenger  and  goods,  and  working 
expenditure  and  net  profits  from  railway  working  of  the 
railway  companies,  etc.,  1860-date. 

Report  by  the  Board  of  Trade  upon  all  the  railway,  canal, 
tramway,  gas,  electric  lighting,  water  bills,  and  provisional 
orders  of  session,  1860-date. 

Annual  report  of  the  Railway  Commissioners,  1875-date. 
Railway  returns  for  England  and  Wales,  Scotland  and  Ire- 
land, with  summary  tables  for  United  Kingdom,  1854-date. 
NEWSPAPERS,  MAGAZINES,  ETC. 

Economist  (weekly),  London,  1844-date. 

London  Times,  1800-date. 

Railway  Times,  Weekly,  London,  1838-date. 

Annals  of  American  Academy  of  Political  and  Social  Science, 
Philadelphia,  Pa.,  vol.  10. 

Moody 's  Magazine,  May,  1909. 

Political  Science  Quarterly,  March,  1910. 


190  RAILWAY   FINANCE  IN   ENGLAND  [190 

Quarterly  Journal  of  Economics,  May,  1910. 

Journal  of  Political  Economy,  July,  1910. 

Quarterly  Review,  1844,  v.  74. 
AUTHORS. 

Acworth,  W.  M.,  Elements  of  railway  economics,  1905.  The 
Clarendon  Press,  Oxford. 

Acworth,  W.  M.,  Railways  of  England,  London,  1900. 

Aeworth,  W.  M.,  The  railway  and  the  trader,  John  Murray, 
London,  1891. 

Adams,  C.  F.,  Railroads,  their  origin  and  problems.  Put- 
nam's Sons,  N.  Y.,  1886. 

Beach,  Chas  F.,  Railways  in  England,  Moody 's  Magazine,  May, 
1909. 

Bress,  S.  C.,  Railway  practice,  J.  Williams,  London,  1839. 

Bress,  S.  C.,  Appendix  to  railway  practice,  containing  a  co- 
pious abstract  of  the  evidence  given  upon  the  London  & 
Birmingham  and  Great  Western  Railway  bills.  Series  1 
and  2,  Lond.,  1839. 

Chattaway,  E.  D.,  Railways,  their  capital  and  dividends,  J. 
Weale,  Lond.,  1835. 
Railways,  their  capital  and  dividends,  1855-1856. 

Churton,  Ed.,  Railroad  book  of  England,  Lond.,  1851. 

Davis,  A.  E.,  The  nationalization  of  railways,  A.  C.  Black, 
Lond.,  1908. 

Fairbairn,  Henry,  A  treatise  on  the  political  economy  of  rail- 
roads. J.  Weale,  Lond.,  1836. 

Findlay,  Sir  George,  The  working  and  management  of  an 
English  railway,  Whittaker  &  Co.,  N.  Y.,  1899. 

Francis,  John,  History  of  the  English  railway,  London,  1851. 

Fraser,  John  F.  C.  A.,  British  railways,  statistically  consid- 
ered, Effingham  Wilson,  Lond.,  1903. 

Gait,  Wm.,  Railway  reform,  its  importance,  etc.,  Longman, 
Greene  &  Co.,  Lond.,  1865. 

Grinling,  Charles  H.,  The  ways  of  our  railways,  Ward,  Lock 
&  Co.,  Lond.,  1905. 

Hadley,  A.  T.,  Railroad  transportation,  Putnam's  Sons,  N. 
Y.,  1903. 

Jeans,  J.  S.,  Jubilee  memorial  of  the  railway  system,  Long- 
man, Green  &  Co.,  Lond.,  1875. 


191]  BIBLIOGRAPHY  191 

Railway  problems,  Longman,  Green  &  Co.,  1887. 
Johnson,  E.  R.,  American  railway  transportation,  Appleton 

&  Co.,  N.  Y.,  1907. 
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74. 

Lardner,  Dionysius,  Railway  economy,  Taylor,  "Walton  &  Ma- 
berly,  Lond.,  1850. 

McDermott,  E.  R.,  Railways,  Methuen  &  Co.,  Lond.,  1904. 
McPherson,  Logan  G.,  Transportation  in  Europe,  H.  Holt  & 

Co.,  N.  Y.,  1910. 
Paish,  George,  The  British  railway  position,  The  statist,  Lond., 

1902. 
Parloe,  Joseph,  Our  railways,  C.  Kegan  Paul  &  Co.,  Lond., 

1876. 

Pattinson,  J.  P.,  British  railways,  Lond.,  1893. 
Pendleton,   John,   Our   railways,   their  origin,   development, 

etc.,  Lond.,  1896. 

Poussin,  G.  T.,  Notice  sur  les  chemins  de  fer  anglais  ou  re- 
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1907. 

Pratt,  E.  A.,  Railways  and  their  rates,  Lond.,  1905. 
Railways  and   their  shareholders,   by  an   edingro   reviewer, 

Lond.,  1849. 
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J.  Bigg,  Lond.,  1837. 

Ross,  H.  M.,  British  railways,  Ed.  Arnold,  Lond.,  1904. 
Sakolski,  A.  M.,  Control  of  railroad  accounts,  etc.,  Quarterly 

journal  of  economics,  May,  1910. 
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July,  1910. 
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Stock  watering,  Political  science  quarterly,  March,  1910. 
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ments, etc.,  Lond.,  1859. 


INDEX 


Abandonment  of  railways  act,  1850, 
p.  32  n,  35,  56,  57,  87 

Accommodation  bills,   69 

Accounting,  railway,  15,  21,  25-26, 
149-174 

Act,  abandonment  of  railways,  1850, 
p.  32  n,  35,  56,  57,  87;  canal,  17, 
23,  82  n;  clauses  consolidation, 
19;  companies,  1862,  p.  48,  107  n, 
124,  155;  companies  arrangement 
and  debenture  holders,  1867,  p. 
24;  companies  clauses,  1845,  p.  20, 
21,  32-33,  37,  47,  55,  57,  85,  86, 
107,  124,  150,  175,  183;  companies 
clauses,  1845,  1863,  p.  14,  21,  36, 
37,  38,  39,  45,  63,  79,  90,  110  n, 
125;  companies  clauses,  consolida- 
tion, 1845,  p.  52,  100,  104,  105; 
companies,  1862,  p.  186;  com- 
panies securities,  1866,  p.  22,  153; 
Coventry  railway,  1910,  p.  124; 
Croydon,  1837,  p.  46,  56,  149; 
lands  clauses,  1845,  p.  32  »;  lands 
clauses  consolidation,  1860,  p.  88- 
89;  London  and  Croydon  railway, 
1837,  p.  31,  54,  103  »;  London 
and  Northwestern  Railway,  1851, 
p.  60;  Midland,  1897,  p.  134  n; 
of  1863,  p.  68;  railway  accounts, 
1911,  p.  15;  railway  and  canal 
traffic,  1888,  p.  131;  railway 
clauses,  1845,  p.  151 ;  railway  com- 
panies, 1864,  p.  37  n;  railway 
companies,  1867,  p.  14,  24,  48,  77- 
79,  125,  180;  railway  companies, 
1868,  p.  77  n;  railway  companies, 
1911,  p.  28;  railway  companies 
(accounts  and  returns),  1911,  p. 
171-172;  railway  companies  se- 
curities, 1866,  p.  14,  66,  114,  116 


n,  117,  118;  railway  construction 
facilities,  1864,  p.  33  n,  45,  48,  99- 
100;  railway  regulation,  1844,  p. 
19,  150;  railway  regulation,  1868, 
p.  184;  railway  regulation,  1871, 
p.  14,  26-27,  28;  railway  construc- 
tion facilities,  1864,  p.  123;  regu- 
lation of  railways,  1844,  p.  85; 
regulation  of  railways,  1868,  p.  14, 
26,  41,  42,  154,  165-168,  173 ;  reg- 
ulation of  railways,  1871,  p.  131 

Adams,  C.  F.,  18 

Audit,  uniform  system  of  govern- 
ment, advocated,  21 

Auditing  systems  of  state,  175-187 

Beauchamp,  Earl,  123  n 

Belmore,  Earl  of,  113 

Bill,  Brighton  railway,  125;  com- 
panies clauses,  1863,  p.  99;  Cov- 
entry railway,  1910,  p.  187  n; 
joint  stock  companies  accounts, 
1868,  p.  158;  model,  of  the  house 
of  lords,  1909,  p.  100  n;  railway 
and  joint  stocks  companies  ac- 
count, 1868,  p.  155;  railway  audit 
of  accounts,  1867,  p.  158;  railway 
companies,  1867,  p.  73-77;  railway 
companies  arrangement,  1867,  p. 
73;  railway  companies  securities, 
1866,  p.  114;  railway  debenture 
holders,  1867,  p.  70-71,  73;  regis- 
tration of  railway  debentures, 
1865,  p.  Ill,  112-113,  114;  regu- 
lation of  railways,  158-165;  regu- 
lation of  railways,  1868,  p.  121, 
182;  West  Hartlepool  harbor  and 
railway,  109;  model,  of  the  house 
of  lords,  1909,  p.  94  n 

Brecon  and  Merthyr  railway  com- 
pany, 45 


193 


194 


RAILWAY  FINANCE  IN  ENGLAND 


Brighton  and  Chichester  railway,  31 

Brighton  railway,  49,  125 

Brighton  railway  bill,  125 

Caledonian  railway,  46,  76  n,  128  n 

Calls,  33,  35-36,  47,  122 

Canal  acts,  17,  23,  82  n 

Capital,  control  of  borrowing  power 
of,  53-121;  method  of  raising  and 
spending  additional,  44-51 

Cardigan   and   Carmarthen   railway, 

105  n 

Chatham,  London  and  Dover  rail- 
way, 65,  66,  101,  105  n,  125  n; 
land  case  of,  67 

Chichester  and  Brighton  railway,  31 
Clauses  consolidation  acts,  19 
Clanricarde,  Marquess  of,  97  n,  112 
Clyde   and   Forth   Navigation   Com- 
pany, 46 
Commission,  royal,  on  railways,  11, 

25,  26,  42 

Committee  appointed  in  parliament 
to  investigate  railways,  1836,  p. 
17;  1839,  p.  35;  1840,  p.  17;  1844, 
p.  18,  19,  84;  1848,  p.  87;  1849, 
p.  20;  1863,  p.  22,  63,  98-99;  1864, 
p.  22,  63,  64  n;  departmental,  on 
railway  accounts  and  statistics, 
1909,  p.  168  n,  170;  Lords',  1849, 
p.  44;  committee,  Lords,  1864,  p. 

106  n,  107  n,  108,  109  n,  111  n, 
114,  119  n,  120  n ;  on  railway  bills, 
31;  on  railway  borrowing  powers, 
1864,  p.  83  ft,  95  n,  96  n,  105  n; 
select,    1849,    p.    154,    176,    179; 
select,  1882,  p.  50  n;  select,  1890, 
129   n,    135,    137,    138,    142,    143, 
146;     standing,     of    accountants, 
173 ;  Ways  and  Means,  129 

Companies  act,  1862,  p.  48,  107  n, 
124,  155,  186;  arrangement  and 
debenture  holders  act,  1867,  p.  24 ; 
clauses  act,  1845,  p.  14,  20,  21,  32- 
33,  37,  47,  55,  57,  85-86,  107,  124, 
150,  175,  183 ;  1863,  p.  21,  36,  37, 
38,  39,  45,  63,  79,  90,  110  n,  125; 
1869,  p.  126;  clauses  consolidation 


act,  1845,  p.  52,  100,  104,  105; 
clauses  bill,  1863,  p.  99;  securities 
act,  1866,  p.  22,  153 

Company,  Brighton  railway,  125; 
East  India,  57;  lands  improve- 
-ment,  109 

Consols,  72 

Cork  and  Yanhol  railway,  105  n 

Coventry  railway  bill,  1910,  p.  187 
n;  railway  act,  1910,  p.  124 

Crawford,  E.  W.,  71  n,  73 

Croydon  and  London  railway,  act, 
1837,  p.  17,  31  n,  43  n,  46,  54,  56, 
103  n,  149 

Croyden,  railway  to,  projected,  19 

Debenture,  22,  24,  30,  46,  50  n,  53- 
80,  91,  92,  93,  98,  102,  105,  106, 
107,  108,  109,  110,  111,  112;  hold- 
ers bill,  railway,  1867,  p.  70-71, 
73;  shares,  121,  137,  138;  stock, 
21,  22,  25,  45,  53,  90 

Departmental  committee  on  railway 
accounts  and  statistics,  1909,  p. 
168  n,  170 

Donong,  Earl  of,  105 

Dover  and  Chatham  railway,  125  n 

Dover,  London,  Chatham  and,  rail- 
way, 65,  66,  101,  105  n;  land  case 
of,  67 

Dowlais  and  Ivor  railway,  46 

East  India  Company,   57 

Eastern  Section  railway,  65 

Ten  duty,  89 

Finance  companies,  23 

Forth  and  Clyde  Navigation  com- 
pany, 46 

Great  Eastern  railway,  65, 101, 125  n 

Great  Northern  railway,  40,  43,  101, 
126,  126  n 

Great  Western  railway,  101 

Ground  annual,  89 

Hartlepool,  West,  harbor  and  rail- 
way company,  92,  99,  105  n,  109 

Hassard,  M.  D.,  110 

Hunt,  Sir  William,  155,  158 

Interstate  commerce  commission,  171 

Insecurities,  105 


INDEX 


195 


Investors,  protection  of,  12 
Ireland,  registration  of  deeds  in,  113 
Isle  of  Wight  railway,  128  n,  142 
Ivor  and  Dowlais  railway,  46 
Joint  stock  companies  accounts  bill, 

1868,  p.  158 
Land   clauses   act,    1845,    p.    32    n; 

clauses  consolidation  act,  1860,  p. 

88-89;  improvement  company,  109 
Legislation  on  railway  finance  divid- 
ed into  three  periods,  14 
Lloyd's  bonds,  22,  65-66,  78,  94-98, 

111 
Lean    capital,    53-80;    attempts    of 

parliament  to  make  safe,  53-56 
London  and  North-western,  40,  101, 

179 
London  and   North-western  railway 

act,  1851,  p.  60,  101,  179 
London  and  South-Western  railway, 

42,  128  n,  141 

London,    Chatham    and   Dover    rail- 
way, 65,  66,  101,  105  n;  land  case 

of,  67 
Lords'  committee,  1849,  p.  44;  1864, 

p.  106  n,  107  n,  108,  109  n,  111  n, 

114,  119  n,  120  n 
Manchester       railway       conference, 

1868,  p.  161 
Mersey  railway,  101 
Merthyr    and   Brecon    railway   com- 
pany, 45 

Metropolitan  railway,  101,  125 
Meyer,  B.  H.,  10 
Midland  act,  1897,  p.  134  n 
Midland  railway,  101,  134 
Model  bills  and  clauses  of  the  house 

of  lords,  1909,  p.  42  n,  94  n,  100 

n 

North  British  railway,  126 
North  Eastern  railway,  101 
Panic  of  1844,  p.  18;  of  1865,  p.  66, 

70;  of  1867,  p.  23 
Pitlake,  railway  to,  17 
Preference  shares,  27,  30,  39-40,  121, 

122 
Pre-preference  stock,  76 


Eailway:  see  specific  names 

Railway  accounts  act,  1911,  p.  15; 
and  canal  traffic  act,  1888,  p.  131; 
and  joint  stocks  companies  ac- 
count bill,  1868,  p.  155;  audit  of 
accounts  bill,  1867,  p.  158;  clauses 
act,  1845,  p.  151;  companies  act, 
1864,  p.  37  n;  companies  act, 
1867,  p.  14,  24,  48,  77-79,  125, 
180;  companies  act,  1868,  p.  77  »; 
companies  act,  1911,  p.  28;  com- 
panies (accounts  and  returns)  act, 
1911,  p.  171-172;  companies  ar- 
rangement bill,  1867,  p.  73;  com- 
panies bill,  1867,  p.  73-77;  com- 
panies securities  act,  1866,  p.  14, 
66,  114,  116  »,  117,  118;  com- 
panies securities  bill,  1866,  p.  114 ; 
construction  facilities  act,  1864, 
p.  33  n,  45,  48,  99-100,  123;  de- 
benture holders  bill,  1867,  p.  70- 
71,  73;  regulation  act,  1844,  p. 
19,  150;  regulation  act,  1868,  p. 
184;  regulation  act,  1871,  p.  14, 
26-27,  28 

Redesdale,  Lord,  22  n,  41,  62,  73,  87, 
117,  125 

Registration  of  railway  debentures 
bill,  1865,  p.  Ill,  112-113,  114; 
railway  securities,  103-120 

Regulation  of  English  and  American 
railways  similar,  9-10;  railway 
finance  by  two  sets  of  rules,  13- 
14;  railways  act,  1844,  p.  85; 
railways  act,  1868,  p.  14,  26,  41, 
42,  154,  165-168,  173;  railways 
act,  1871,  p.  131;  railways  bill, 
158-165;  railways  bill,  1868,  p. 
121,  182 

Richmond,  Duke  of,  24,  41,  73,  121 

Royal  commission  on  railways,  1867, 
11,  25,  26,  42,  119  n,  132,  154,  157, 
179,  180 

Select  committee,  1849,  p.  154,  176, 
179;  1882,  p.  50  n;  1890,  p.  129 
n,  135,  137,  138,  142,  143,  146 


196 


RAILWAY  FINANCE  IN  ENGLAND 


Shares,  30-52;  act  relating  to,  21; 
cancellation  and  surrender  of,  36; 
method  of  raising  additional,  37; 
preference,  27,  30,  39-40;  pre- 
ferred and  deferred,  40-52;  regis- 
tration of,  33-35;  transfer  of,  33- 
35 

Sheffield  railway,  125  n 

Somerset,  Lord,  19,  47,  124  n 

SdUth  Coast  railway,  41 

South  Coast  railway  bill,  1868,  p.  41 

South  Eastern  railway,  66 


Standing  committee  of  accountants, 
173 

Stocks,  debenture,  90 

Stocks,  pre-preference,  76 

"Stock  splitting,"  40-43 

Stock-watering,  15,  27,   42,  121-148 

Taff  Vale  railway,  126-127,  128 

United  States  industrial  commis- 
sion, 187 

Wandsworth,  railway  from,  17,  19 

West  Hartlepool  harbor  and  railway 
company,  92,  99,  105  n,  109  ' 

Yanhol  and  Cork  railway,  105  n 


I 

0112084204418          J 


